‘Term Loan Appraisal’ technique is explained in this article.
Terms Loans are granted to finance Capital Expenditure like plant & machinery, land and building or setting up an entire unit. Term Loans have a specific repayment period and are generally repayable in installments.
Cash generating capacity of the unit is the main consideration while appraising Term Loan. The concern of a lending institution is whether, the unit generate sufficient cash flows to serve the Term Loan installment and interest during the repayment period.
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Term Loan Appraisal consists of following assessment:
Management Evaluation
First step in Term Loan Appraisal is evaluating the Management of prospective borrower. It is to be ascertained that whether promoters have background, experience and knowledge to implement and run the project. Experience and qualifications and expertise of Key persons working in the entity in the functional areas, such as production, purchases, sales, administration, finance etc should also be evaluated.
Technical Feasibility
It is to be analyzed that how the technical requirements of the project can be met. For example availability of infrastructural facilities, raw materials, labour and other utilities, technology required for the manufacturing process etc.
Profitability of the unit to very large extent depends upon productivity of the unit, accordingly, it is to be assessed that if the product mix, quality and quantity can produced as projected and whether the projections are realistic and achievable with given parameters.
Economic Viability
Economic viability of a unit depends upon the sales. Accordingly, sales projections should be analyzed critically and assessed keeping in view:
a) demand and supply of the product and its substitutes
b) proposed selling price per unit (to be compared with prices of competing products)
c) quality of the product (also to be compared with quality of competing products)
Financial Viability
Determining Financial viability is a very important step in Term Loan Appraisal, since the repaying capacity of the project depends on financial viability of the project.
Break-even point is calculated as under:
Break-even point = Total Fixed Cost .
(Sales volume in units) (Sales price per unit – Variable Cost per unit
Break-even point = Total Fixed Cost x Sales
(Sales volume in rupees) (Sales) – (Variable Costs)
Also Read – Filing of Charge with CERSAI for Movable & Intangible Assets now mandatory
Data to be obtained from the borrower for Term Loan Appraisal:
i) Cost of project and means of financing
ii) Profitability projections (upto the period till TL repayment is completed)
iii) Cash-flow estimates (upto the period till TL repayment is completed)
iv) Projected Balance Sheets (upto the period till TL repayment is completed)
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