CIMA F2 Syllabus A. Financing capital projects - Bank Loans - Notes ^{7 / 13}

Bank loans

1. Are for:

   - a fixed amount
   - an agreed period of time

2. You will have to repay it.

   eg monthly, quarterly or annually.

3. The bank may require security for the loan.

4. The interest rate may be:

   1) Fixed (for the period of the loan)
   2) Variable (set at a fixed percentage above the bank base lending rate) 
   3) Capped (the bank guarantees a maximum rate of interest).

5. A loan covenant may be set by the bank. 

   This is a condition that the borrower must comply with.

   If they do not, the loan is considered to be in default and the bank can demand repayment.

Examples of debt covenants:

• Positive covenants

  - involve maintaining certain levels of particular financial ratios.

  Examples:
  Debt to equity (gearing), 
  Interest cover and 
  Net working capital.

• Negative covenants

  - limit the borrower’s behaviour.

  Examples:
  - Not being allowed to borrow from another lender or 
  - Limitations on the level of dividends a company is permitted to pay. The lender does this to mitigate the risk of default by preserving the company’s future cash flows.