Term Loan

Some capital needs do not come and go — they arrive once and stay. A machine, a fit-out, a warehouse, an acquisition, the permanent core of a bigger balance sheet: money spent on these is occupied for years and comes back only through years of earnings. A revolving line is the wrong shape for that — permanent occupation would defeat its clean-down and turn optionality into disguised debt. The term loan is the honest product for permanence: the full amount advanced at the start, a repayment schedule matched to the earning life of what was financed, and a balance that falls month by month until it is gone.

That falling balance is the product's essence, and the mirror image of everything on the revolving credit facility file. A revolver's exposure is chosen by the borrower, continuously; a term loan's exposure is largest on day one and declines by design. The bank's risk decreases as the loan ages, the borrower buys no optionality and pays for none — which is why the margin runs cheaper — and the entire credit question compresses into one word: serviceability. Can this business's earnings carry this schedule through a bad year, not just an average one?

Amount and purpose — tied to a named acquisition or asset, usually funding most but not all of it, so the borrower's own equity is in the deal first. Tenor — matched to the earning life of what is financed: equipment over its useful years, property longer, and working capital ideally not at all. The amortisation profile — the load-bearing choice: level principal-and-interest instalments; an interest-only period before amortisation begins; or a balloon, where the schedule deliberately leaves a lump at maturity. Rate — fixed or floating, a risk allocation with a real price either way, including the break costs a fixed rate carries out the exit door.

Around the skeleton: security, commonly the financed asset plus a general security agreement, with guarantees where ownership structure demands them; covenants, led by debt service cover and tested at a slower rhythm than a revolver's — the exposure is falling, so the monitoring can breathe; and prepayment terms, which decide what flexibility costs when the business sells the asset or refinances early. There is no commitment fee, no clean-down, no annual repricing window: the deal is struck once, and both sides live with it — which is precisely why the structuring judgment happens up front or not at all.

The margin is the cheap part; the profile is where the money moves. A constructed illustration, every figure invented for teaching — NZ$1.0m over five years at 6.50%:

Same loan, same rate — nearly double the interest, because interest is charged on what is outstanding and amortisation halves the average balance. This is the table to put in front of a borrower asking for interest-only “to help cash flow”: sometimes that request is a sensible bridge across a build phase, and sometimes it is the loan announcing that the schedule was never affordable. The two look identical on the application and completely different in the cash flow arithmetic, which is where a desk settles the question.

Earnings first, security second. A term loan is repaid by the business's cash generation across years; security exists for the day that fails. A desk that approves on collateral value has the order backwards — the second way out is called second for a reason. The central number is debt service cover: earnings against the schedule, stress-tested for the bad year, because five-year loans live through whole cycles and the average year repays nothing if the worst year defaults.

Tenor against asset life. A loan should die before the thing it financed does. Financing a seven-year machine over ten years leaves three years of debt with no earning asset behind it; those tail years are where overlong loans go to fail. The balloon question. Every balloon is a deferred credit decision — someone, at maturity, in conditions nobody today can see, must either refinance or repay. The desk's question is not whether balloons are bad but who is carrying the refinance risk and whether the residual assumption underneath it is honest. And the shape of the commitment behind the loan. Where the financed asset serves one customer or one contract, the loan's real tenor is the commitment's tenor, not the asset's — Issue 05 turns entirely on that distinction, amortising dedicated assets inside the customer's notice period rather than across their physical life.

Working capital dressed as term debt. The mirror of the revolver's plateau problem: a permanent-looking cash need gets termed out, and two years later the business is back for a line anyway because the need was cyclical and the term loan removed all flexibility. The sorting rule runs on the cycle arithmetic, not on which product the borrower asked for.

The affordable-looking balloon. Instalments sized to fit the cash flow by pushing the unaffordable part to maturity — with no residual value and no credible refinance path behind it. The loan performs beautifully for years and then fails all at once, on schedule.

Break costs discovered at the exit. A borrower fixes five years, sells the asset in year two, and meets the hedge unwind for the first time in the payout letter. The conversation costs nothing at signing and a relationship at discharge.

The set-and-forget file. No annual reprice, a slower covenant rhythm, a falling balance — everything about a term loan invites inattention, and inattention is how a desk discovers at year four that the customer behind the financed asset left at year two. Declining exposure is not the same thing as declining risk.

Issue 05 is term lending at full difficulty: a NZ$6.0m expansion where the senior read splits the amortisation by commitment — generic assets over five years, dedicated fit-out inside thirty-six months — because the risk was never the customer's credit but the asymmetry of commitment. The products this one is constantly weighed against are the revolving credit facility and the overdraft; the vocabulary lives in the glossary; and the borrower's side of the structuring conversation is How Banks Read You.