Instrument Overview
A term loan is a loan with a fixed term, whereby a defined sum must be repaid under pre-defined conditions (interest rate, repayment schedule etc.) over a defined period of time. Unlike revolving credit lines, the repaid capital may not be drawn down again.
This means a municipality or city borrows a fix amount and repays the instalments over a set period of time.
Why it matters for cities
Financing new climate-friendly infrastructure: Term loans are ideal for long-term, sustainable projects such as energy renovations, green mobility, or climate adaptation measures. They offer predictable repayments and easily calculable interest rates.
Key Features
- Loan tenure usually 3-10 years, sometimes up until 20 years
- Fixed repayment plan (annuity or bullet repayment)
- Fix or variable interest, depending on loan terms
- Suitable for mid to large-scale projects
- Lower risk for lender if repayment is secured by budgetary guarantees; good predictability for cities and municipalities
How it works
- Project Definition – City identifies a sustainable infrastructure objective (e.g., renewable energy, flood-resilient infrastructure).
- Loan Application – The municipality applies to a bank, funding agency, or multilateral institution.
- Approval and Disbursement – Following credit and project review, the loan is granted in a lump sum.
- Project Implementation – City executes the infrastructure project using the funds.
- Repayment – Paid back per schedule (e.g., annually) from municipal revenues or project-generated income.
- Closure – Loan is fully repaid at end of term, ending obligations.
Benefits & Challenges
Benefits
- Access to long-term, predictable funding for sustainable infrastructure.
- Simple application process.
- Preserves city ownership - no private equity or public-private sale needed.
- Often lower interest compared to commercial loans, especially from development banks.
- Facilitates climate strategy alignment by enabling upfront investment (through receiving an upfront lump sum of cash).
Challenges
- Requires robust financial management and creditworthiness.
- The loan requires collateral and a rigorous approval process to reduce the risk of default or failure to make payments.
- Few existing examples of explicitly "green" municipal term loans in some regions (e.g., Germany has strict budgetary mandates that limit the uptake of term loans).
- Creates long-term budget commitment, potentially constraining future finances.
(Theoretical) Use Case
Scenario: Imagine the city of Winterburg, a medium-sized European municipality, committing to a comprehensive energy retrofit of its public buildings - upgrading insulation, installing solar panels, and overhauling HVAC systems to meet net-zero goals.
Instrument: A term loan from a national promotional bank, structured as a single disbursement of €25 million with a 15-year repayment schedule and a low fixed interest rate.
Purpose: Covers capital expenditures for building retrofits, energy management systems, and project planning.
Repayments: Drawn from a dedicated “Climate Savings Fund,” funded annually by energy cost savings, utility rebates, and minimal reallocation of the city's general revenue.
Features & Mechanism: The loan is not revolving: once repaid, it cannot be reused, aligning perfectly with one-off capital investments.
It is conditional - Green Loan Principles apply: achieving defined energy reduction thresholds (e.g., 40% reduction in energy use) unlocks a rate discount, while failure to meet targets maintains the standard rate. This mirrors emerging forms of sustainability-linked municipal loans such as those MuniFin offers in Finland.
The repayment period reflects the asset life, minimizing budgetary strain and ensuring fiscal alignment.
Such instruments remain rare - particularly in Germany - though institutional channeling via entities like Kommuninvest offers a nearer analogue: Kommuninvest has disbursed Green Loans to hundreds of Swedish municipalities, totaling SEK 115 billion to date, aligning with EU Taxonomy criteria and reflecting real market-level municipal term financing action
When to Use It
Use Phase:
- Planning - Securing funding early for long-term projects.
- Construction - Ensuring reliable capital during implementation.
- Operation - Managing repayments during asset lifecycle.
Applicable Sectors
- Buildings (e.g., energy retrofits, green facilities)
- Mobility (e.g., electric transit infrastructure)
- Water & Waste (e.g., resilient water systems, flood defenses)
- Energy (e.g., renewables, microgrids)
Term loans align well with projects requiring sustained financing over several years or cross project lifespans.