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

1. Project Definition – City identifies a sustainable infrastructure objective (e.g., renewable energy, flood-resilient infrastructure).
2. Loan Application – The municipality applies to a bank, funding agency, or multilateral institution.
3. Approval and Disbursement – Following credit and project review, the loan is granted in a lump sum.
4. Project Implementation – City executes the infrastructure project using the funds.
5. Repayment – Paid back per schedule (e.g., annually) from municipal revenues or project-generated income.
6. 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.

Back to Finance Resource