Companies may seek a variety of corporate loans for working capital, to fund a large purchase or to replace equity financing. In general terms, a company borrows money to be paid back a future date with interest. In return for lending a company money, a bank will become a creditor in the company.
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What types of corporate loan are there?
There are two main categories of corporate loans: bilateral loans and syndicated loans. The difference between bilateral and syndicated loans is the number of lenders involved. Bilateral loans have a single lender whereas syndicated loans have multiple lenders.
Depending on the lender or lenders, a number of different types of loan may be available to a borrower. These loans (also known as facilities) can be categorised by their key features. These include the length of the loan, the lender’s obligations, the number of lenders, the repayment structure and the security required.
The major types of corporate loan are:
- Bridging facilities
- Multiple option facilities
- Term loans
- Revolving credit facilities
- Swingline facilities
We explore these in more detail below.
A corporate overdraft works much like an individual’s overdraft. It provides short-term and easily accessible cash to a business with no notice. It is also known as a working cash facility due to its ability to meet temporary shortfalls in working capital.
A term loan is a more formal loan arrangement. Under a term loan, a lender commits to lending a borrower a specified amount of money for a set period of time. The loan may be repaid in instalments or in a single amount at the end of the loan. A typical term loan varies in duration from between one and five years.
A borrower may be able to access the money in a single payment or in a number of smaller advances (known as tranches). Once money has been repaid under the loan then it is not available to be borrowed again.
Revolving credit facilities
A revolving facility is similar to a term loan in that it provides a maximum amount that may be borrowed for a set period of time. However, unlike a term loan, a borrower may draw and repay the tranches as it sees fit. Similar to an overdraft, the funds are available for almost the entire duration of the loan – except at the end when a repayment schedule applies.
A bridging facility is a sort of short term loan and is designed to only be used in limited circumstances. It usually forms part of a revolving credit facility and is the obligation to provide guaranteed funds, if another method of raising cash fails.
Bridging facilities are common where a borrower is planning to raise money on a capital market. The facility provides cash in the event that the transaction is delayed or the financing is unsuccessful.
Multiple option facilities
Multiple option facilities allow borrowers to mix and match different methods of borrowing within a single agreement.
Multiple option facilities combine formal committed facility agreements with uncommitted facilities. Typically, a formal committed facility agreement will be provided by a syndicate of banks up to a specified figure. Syndicate members will then offer their best priced options for the uncommitted facility when requested by the borrower. The borrower may then take up one of the offers or continue to use the committed facility.
A swingline facility is a short-term committed facility designed to be used in an emergency. Swingline facilities are commonly used by companies issuing commercial paper (a type of debt security). Swingline facilities can be activated very quickly – often over the phone.
Swingline facility interest periods are extremely short (often less than seven days) and the swingline will be repaid from the main facility very quickly. Normally the swingline facility will be part of a larger revolving credit facility.
Key things to be negotiated
All loan facilities will be either committed or uncommitted. A committed loan means that after a loan agreement is signed, a lender is under an obligation to advance money to the borrower. An uncommitted loan is a loan where a lender has discretion as to whether to advance the money. A borrower will need to consider how quickly they need access to the money and under what conditions. Although committed facilities are easier to access, they normally incur a commitment fee calculated on the percentage of undrawn funds.
A borrower should also consider how and when they will have to repay a loan. Loans are either repayable at any time on the demand of the lender (for example, an overdraft) or according to a predetermined repayment schedule (such as a term loan). Scheduled payments may be in equal amounts, in a single payment at the end of a loan or in unequal amounts, normally with the largest at the end of the loan.
Depending on the credit rating of a borrower, a lender may require a security and guarantee package. Security and guarantees give a lender protection against a borrower’s insolvency. These give a lender priority over other creditors in the event of a borrower’s insolvency. For more information on priorities in insolvency, please see our article Who gets paid first in insolvency?
Corporate lending process
Before a lender is prepared to lend money, it will first investigate the financial standing of a borrower. A lender will review the borrower’s accounts and its overall lending commitments. In particular, the lender will want to make sure that the loan doesn’t breach any of its internal or external limits on lending. A lender will also wish to make sure that a company has the resources to repay the loan plus interest.
After a loan has been cleared by a bank’s credit committee, the bank will draw up a term sheet indicating the major terms on which the loan is to be offered. The term sheet sets out the key clauses to be included in the facility agreement.
A commitment letter is then sent to the borrower, together with the term sheet, setting out the terms on which the lender is prepared to make the loan. If the borrower agrees to the terms then the parties will proceed to drafting the loan agreements.
Once the lending agreements are signed, the drawdown of monies by a borrower will depend on the type of lending arrangement in place.