Merits and Demerits of Term Loan | Company's point of view

Term loan offer following merits(advantages) to the borrower:
1. The cost of term loans is lower than the cost of equity capital or preference capital
2.Term loans do not result in dilution of control, as lenders donot ave the right to vote

The demerits of term loans from the borrower's point of view are:
1.The interest and principal repayment are obligatory payments. Failure to meet these payments may threaten the existence of firm.
2.They increase the financial risk of the firm. This in turn tends to raise the equity of cost capital.
3. Term loan contracts carry restrictive covenants that may reduce managerial freedom


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