Intermediate Term Financing

Definition: Required amount of fund collected by a business enterprise for meeting up fund
requirement for acquiring important useable items and making investment from different available
sources for more than one year but less than 10 years’ time period is known as intermediate term
financing.

Features of Intermediate Term Financing

1) Maturity: More than one year and usually maximum of five years. But in some cases it can be
even 7 to 10 years.
2) Size of Loan: Usually less because the financer is either commercial bank or insurance
company.
3) Users of Term Financing: Though small, medium and big all types of institution can avail this
but the companies that does not have access to capital market use it as they cannot sell share or
debenture to raise capital.
4) Objective of Credit: Mostly to meet the need of working capital but in especial cases to
purchase machinery or building expansion it can be used.
5) Sources: The main sources are commercial banks, insurance companies, leasing companies. In
Bangladesh, IDLC and ULC are two main leasing companies providing this sort of financing.
6) Repayment Method: Most of the cases payment is made in installments though sometimes
payment is made at a time at the end of the credit period. In certain cases a part of the principle
and interest is paid together in quarterly, semi-annually or annual installments and it is called
capital recovery method.
7) Security Provision: Since most of the cases used to purchase permanent asset so it is mostly
backed by collateral. Building, machinery plant etc. is used as security.
8) Cost of Financing: The cost i.e. the rate of interest a little bit higher than short term but less
than long term.
9) Flexibility: Lots of flexibility is available with regard to its amount and repayment schedule.
10) Renewable: It can easily be renewed like revolving credit and like.

Different Types of Intermediate Financing

A) Bank Term Loan: Usually commercial bank provide loan to business organization for a period
of more than a year which must be paid according to certain repayment schedule. Sometimes it
is paid at the end of 3 to 5 years or the principle along with the interest in quarterly, semiannual
or annual installments. Since the legal and other administrative expenses have to borne by the
lender the interest rate is higher than short term credit.

B) Revolving Credit: It is short term security less credit arrangement in which the bank agrees to
give credit to the lender up to a maximum agreed upon limit.

For example Tk. 70 lakh loan has been granted to Square Pharmaceuticals by Sonali Bank. Square
can withdraw this money in more than one installments but it cannot exceed Tk. 70 lakh, since
Sonali Bank in under some obligation to give this money so it is needs to pay a commitment fee on

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the unused portion along with the interest on the used portion of the loan. This sort of credit
arrangement can be used for more than a year and extended up to three years.

The amount of revolving credit Tk.10 lakh @12 % (8 lakh in the first and 2 lakh in the second year)

The lender takes credit up to Tk. 8 lakh and do not take credit on the rest Tk.2 lakh on which a
commitment fee of 1% must be paid

Pays interest of Tk. 96,000 (8, 00,000 X.12) and a commitment fee of Tk. 2,000(2, 00,000X.01) in
the first year

Interest on Tk. 2 lakh in the second year= 2, 00,000 X .12= 24,000

Total fee= 96,000 +2,000+ 24,000= 1, 22,000
Therefore real rate of interest= 1, 22,000/ 10, 00,000= 12.2%

However if the total credit requirement is Tk. 10 lakh and it does not avail revolving credit and just
borrow 8 lakh @12% and if the rate of interest raises to 14% then the next 2 lakh has to be
borrowed at a much higher rate of interest.

Total interest=96000+ 28,000= 124,000

Real rate of interest= 124,000/10, 00,000 10, 00,000=12.4%
So the real rate of interest is less under revolving credit arrangement
The amount saved= 1, 24,000- 1, 22,000= 2,000
Beside the interest expense additional cost and paper work associated with arranging a new loan
agreement can be avoided under revolving credit arrangement,

C) Insurance Company Term Loan: Insurance and other companies give this type of loan and
the peculiarity of this loan is it is relatively long term and at a higher rate of interest but unlike
banks they do not take the advantage of compensating balance but they will take a pre-payment
penalty if the installment amount is paid beforehand because they do not want to leave their
money idle.

D) Equipment Financing- Here the lender can take credit by keeping any marketable equipment
as security equal to a certain portion of its price. Usually it is for more than a year and since
equipment is kept as security it is called secured term financing.

E) Lease Financing: It is a contract between lessor and lessee under which the lessor allow the
lessee to use his asset in exchange of certain rent. The rent must be paid in monthly, quarterly,
semiannual or annually. At the end of the lease period the asset can be taken by the lessor or it
can be purchased by the lessee. Though the lessor is the legal owner of the asset but the lessee
bears all the risk related to the asset. The maintenance of the asset is the lessee’s responsibility.

Sources of Intermediate Term Financing

 Commercial Bank
 Insurance Company

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  Development Bank
 Finance Company
 Islamic Bank Bangladesh Limited (IBBL)
 Leasing Company (IDLC, ULC)
 Grameen Bank
 Pension and Provident Fund

Advantages of Intermediate Term Financing

1) Flexibility- It can be availed as required depending on the relationship between lender and
borrower. It can be paid as soon as the necessity is met thereby reducing the cost of borrowing.
2) Low Cost- The cost is less than long term financing. Its collection cost is also less than long
term financing.
3) Convenience in Repayment- It can be repaid in installments as well as at once.
4) Renewable- it can renewed through different arrangement like revolving credit.
5) Maintaining Secrecy- Unlike collecting money through shares and debentures secrecy can be
maintained in case of intermediate term financing.
6) Goodwill for the Borrower- A good relationship is created between lender and borrower for
this the goodwill of the borrower is enhanced in the market.
7) Rapid Financing- Selling shares and debenture to raise capital is time consuming and many
formalities involved whereas intermediate term financing much less formal.
8) Control- When financing is done through selling shares different types of interference by the
share owners exist but these are absent is case of intermediate term financing.
9) Only Source for Small Firms- For small and less known companies this is the only source.
10) The scope to use others asset without capital involvement.

Disadvantages of Intermediate Term Financing

1) Comparatively high cost in comparison to short term financing

2) Inconvenience of installments payment especially for companies those are unable to match
receipt and payments
3) Security collateral is required in case of bank and insurance companies
4) For new and weak firms it is difficult to obtain intermediate term financing
5) The lender may impose certain requirement like liquidity provision, imposition of restriction on
the sale of property
6) Compensating balance is required that increases the effective rate of interest
7) If a project requires long term financing but if intermediate term financing is used, then it will
become risky

The Users of Intermediate Term Financing

 Manufacturer
 Service Industries
 Small and Cottage Industries
 Medium and Large Scale Trading Concern
 Farmers

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