DEFINITION of 'Term Out'

Term out is a financial concept used to describe the transfer of debt internally, within a company's balance sheet. This is done through the capitalization of short-term debt to long-term debt. Changing the classification of debt on the balance sheet allows companies to improve their working capital and take advantage of lower interest rates.

BREAKING DOWN 'Term Out'

Term out is the accounting practice of capitalizing short-term debt into long-term without acquiring any new debt. The ability for a company or lending institution to "term out" a loan is an important strategy for debt management and normally occurs in two situations.

Term Out on a Facility Loan

A facility loan is a banking agreement that allows a company to borrow short-term financing periodically. Bank facilities are put in place by a company to ensure it has consistent access to cash and liquidity at any point in time. Businesses with cyclical sales cycles or seasonality normally take out a bank facility loan to ensure they have enough cash on hand to purchase inventory during busy times, and pay employees during quiet periods.

Manufacturing companies, for example, face high seasonality. Often, most of a manufacturer's business comes in the summer months, when it makes products to be sold by retailers in the fourth quarter. This means manufacturers have slow periods at the end of the year, when retailers typically have their busiest sales period. However, retailers do not make a lot of purchases during this time, and some manufacturers are strapped for cash as they try to maintain payroll.

When a situation like this occurs, a manufacturer can take out a facility loan to cover expenses in the fourth quarter. Then, if the loan balance is particularly high, the company can term out the loan and extend the repayment period, effectively reclassifying it from short-term debt to long-term debt. Terming out a facility loan is very advantageous for companies that have cash flow issues.

Term Out on an Evergreen Loan

Evergreen loans are revolving debt instruments. This means a company can use an evergreen loan, pay the money back and immediately use it again. The loan is reviewed by the lending institution annually, and if the company continues to meet certain requirements, it can draw on the loan continuously. The most common type of evergreen loan is a revolving line of credit.

However, there are situations that arise where companies fully extend the loan and never repay the principal, instead paying only the monthly interest payments. When this happens, the lending institution can term out the loan by amortizing the principal, effectively converting the company's interest-only payments to monthly payments that combine interest and principal.

RELATED TERMS
  1. Term Loan

    A term loan is a loan from a bank for a specific amount that ...
  2. Loan

    A loan is money, property or other material goods that is given ...
  3. Working Capital Loan

    A working capital loan is a loan that is taken to finance the ...
  4. Commercial Loan

    A commercial loan is a debt-based funding arrangement that a ...
  5. Problem Loan

    A problem loan is a loan in which the borrowers cannot or are ...
  6. Debt

    Debt is an amount of money borrowed by one party from another, ...
Related Articles
  1. Personal Finance

    Should You Take Out A Personal Loan to Family?

    Find out how loaning cash to family or friends can put a strain on your relationship and your bank account. Learn how to properly make family loans safe.
  2. Personal Finance

    Crush Your Student Loan Debt With These Tips

    Conquering high-interest-rate loans first and paying extra can help you crush your student loans.
  3. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  4. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  5. Personal Finance

    College Loans: Private vs. Federal

    Not all student loans are the same. Learn the difference between federal vs private student loans.
  6. Personal Finance

    Getting a loan without your parents

    Do you want to receive a loan without the help of your parents? Use these five tips to finance your dreams without banking on a second signature.
  7. Personal Finance

    Best 5 Money-Saving Tips to Get out of Debt

    Understand the different types of debt and the reasons why people get into debt. Learn about five tips to follow to get out of debt.
  8. Personal Finance

    An Introduction to Federal Direct Loans

    Federal Direct Loans provide student funding that a majority of people can easily access. Find out if you qualify.
  9. Personal Finance

    How Mortgage Loan Officers Work: Protect Yourself

    Learn how a mortgage loan officer thinks while offering you mortgage products so you can protect yourself and choose and compare the best loan for you.
  10. Personal Finance

    How Residents and Physicians Can Tackle Student Debt

    Here's how residents and young physicians can tackle their debt load while saving.
Trading Center