A business loan is a loan specifically intended for business purposes. As with all loans, it involves the creation of a debt, which will be repaid with added interest. There are a number of different types of medium term business loans in Nigeria including mezzanine financing, asset-based financing, invoice financing and microloans.
Medium-term finance refers that repayable within three to five years. it can be obtained in a number of ways for varied uses and repayment patterns. In the main, medium-term finance is used by companies to help buy assets with corresponding medium range life such as plant and machinery or to provide general working capital or to fund hard-core overdrafts inherent in a restructuring of facilities arrangement. Medium-term loans are provided as part of a package of financial facilities and repayment may either be made in one sum at an agreed date, or more usually by installments over as a period. Banks are willing to tailor the pattern of to fit the earning capacity of the asset being acquired or usually to the estimated cash flow of business. Before granting this type of loan, a bank will seek to satisfy itself about the commercial viability of the project, management capability and cash flow potentials to establish that repayment of the loan can be met.
The advantage of medium-term loan can be summarized thus:
- It contractually assures the borrower of the stability of finance as to term and amount. Draw-down can be progressively done to match with the actual asset being created with the loans, thus preventing the building up of idle cash that may not be immediately required.
- Sometimes banks agree to a fixed rate of interest on medium-term loans, though most banks will generally apply a margin above their prime rate to make room for flexibility. However the advantage of a fixed rate enables the borrower to estimate his future cash with confidence and certainty. If it is at variable rate of interest, it enables the borrower to secure some of the benefits when rates fall.