Corporate loans: the basics

Your company may need loans for a variety of reasons, from funding your working capital and buying equipment, to replacing your shareholdings with finance. Generally, your business will borrow money and repay it by a set date, making interesting payments from time to time, or at the end.

By lending you money, your bank or other finance house will become one of your company’s creditors.

In this article, we take a look at the different types of loans, and what they mean for your business.

What types of business loan are there?

There are two main types of loans made to companies: 

• bilateral loans involving a single lender and the borrower, and 
• syndicated loans where there are multiple lenders involved in the transaction.

In addition to this distinction, loans or ‘facilities’ tend to have key characteristics such as the length of the loan, the amounts involved, how the loans will be repaid, and what security will be offered by the borrower.

What is the difference between a bilateral loan and a syndicated loan?

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.

These loans (also known as facilities) can be categorised by certain key characteristics. These include the length of the loan, the lender’s obligations, the number of lenders, the repayment structure, and the security required.

Here are a few different types of company loan types:

• Bridging loans
• Multiple option facilities
• Overdrafts
• Term loans
• Revolving credit facilities
• Swingline facilities

What are overdrafts?

A business overdraft works in a similar way as a personal overdraft. By arranging an overdraft with your bank, you get short-term, easily accessible cash without having to notify your bank in advance. An overdraft is also known as a working capital facility because you can use it to finance temporary shortfalls in your company’s working capital.

What are term loans?

Unlike an overdraft, a term loan is a more formal loan arrangement, under which a lender will commit to lending you a specified amount for a set period of time. You can repay the loan in instalments, or in a single amount at the end of the term, depending on what you negotiate with your lender. Term loans typically run for between one and five years.

In terms of accessing the money, you may be able to receive funds in a single payment, or in a number of smaller advances known as ‘tranches’. Once you repay the loan amounts, this money is not available to be borrowed again, unlike with an overdraft or revolving credit facility.

What are revolving credit facilities?

A revolving credit facility is similar to a term loan, in that you can borrow up to a maximum amount and over a set period of time. However, unlike a term loan, you can draw down and repay money in tranches as you see fit. Like an overdraft, funds are available to you over the course of the loan, except at the end, when you’ll repay the outstanding amount in accordance with a fixed schedule.

What are bridge facilities?

A bridging facility is a type of short-term loan designed to be used in specific circumstances. It’s generally part of a revolving credit facility, whereby the lender provides your company with guaranteed funds if you fail to raise funds by another method, or if that funding is delayed for some reason.

What are multiple option facilities?

Multiple option facilities allow you to mix and match different methods of borrowing within a single loan agreement.

These combine committed and uncommitted facilities, whereby a syndicate of banks will provide the committed portion up to a specified amount and offer best-priced options for the uncommitted portion when the borrower requests it. You can either take up one of the offers or continue to use the committed facility for your finance needs.

What are swingline facilities?

A swingline facility is a short-term loan facility designed to be used in an emergency.

These types of loans are commonly used by companies who are planning to issue 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 are normally part of a larger, revolving credit facility. You’ll repay them from the main facility very quickly.

Committed and uncommitted facilities

Loan facilities will either be committed or uncommitted. A committed loan is where, after signing the loan agreement, the lender is obligated to lend money to the borrower. An uncommitted loan is where a lender has discretion as to whether to advance the money when the borrower requests it. In addition, the lender can ask that the funds be repaid at any time.

Although committed facilities are easier to access, you’ll normally have to pay a commitment fee, calculated on the percentage of undrawn funds. With an uncommitted facility, while you don’t pay a commitment fee, you risk not being able to borrow when you need to and having to repay when the lender requests it.

How loans are repaid

Before you decide to borrow, you need to think about how you will repay the loan. Loans are generally either repayable at any time, on demand by the lender (for example, if the loan is in default, or it’s an uncommitted facility), 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.

What security your bank may want

Your lender may ask for security or a guarantee package from your company, depending on its credit rating. Security and guarantees give lenders protection against a borrower’s inability to make a repayment and priority over other creditors in an insolvency situation.

For more information on priorities in insolvency, please see our article Who gets paid first in insolvency?

The lending process

Before a lender is prepared to lend your company money, it will first investigate its financial standing, including its accounts and overall lending commitments. In particular, your lender will want to make sure that by entering into a loan, your company won’t be in breach of existing loans or other commitments. A lender will also wish to make sure that your 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, and you can negotiate these terms with the lender at this stage.

A commitment letter is then sent to the borrower, together with the term sheet. If the borrower agrees to the terms, then a loan agreement will be drafted. Once this, and any related documents like guarantees or mortgages are signed, the borrower is able to draw down on the finance.