About Corporate Loans

　　Financial loans in India can be broadly classified into two types:

　　Retail Loans

　　Business Loans

Retails loans are offered to individuals for various purposes. Personal loans, Home loans, Vehicle loans, Educational loans, etc., are offered under retail loans.

　　Business loans or Corporate loans are mainly sought out by business owners, corporates and companies, to fulfil their daily business needs or to add to their working capital, to procure raw materials, to acquire assets, etc. It is basically a loan availed to run their business smoothly.

　　Corporate loans are offered in various kinds:

　　Term loans

　　Line of Credit

　　Working Capital loans

　　Venture loans

　　Real estate loans

　　Equipment loans

　　Loan against future lease rentals

　　Export financing

　　Bill financing

　　Short-term loans

　　The above is only a few of the numerous financing options available for businesses. The loans are pre-dominantly secured loans and are offered based on the creditworthiness of the applicant and at the discretion of the bank. These loans involve higher risk and hence come with higher interest rates and strict repayment terms.

　　Usage of a Corporate Loan

　　As mentioned earlier, corporate loans are offered to business entities & corporates. Some of the reasons to avail a corporate loan are

　　To start a new venture :

　　When you have an enterprising idea and would like to put it to action, you require the capital to start it. One can approach a bank or an NBFC to apply for a Venture loan to start a new business enterprise.

　　Daily business needs :

　　A firm or a business entity may need funds to meet the daily expensed of their business. These funds might be required for smaller expenses like rent, utilities, salaries, petty cash, etc. Then you can apply for a loan.

　　Purchase of assets :

　　When the business requires to purchase and install assets like building, machinery and other equipment, they can apply for a corporate loan.

　　Procurement of raw materials :

　　The business needs constant flow of capital to invest in new opportunities. They will require to buy raw materials to start a fresh batch of production. Corporate loans help you to avail quick cash while you are waiting for future payments or pending invoices.

　　Various Forms of Corporate Loans

　　These corporate loans are offered in various forms. Cash is not the only form in which loans are offered. Let us have a look at the various forms of credit offered under Corporate loans

　　Working Capital loans :

　　This is the most basic form of Corporate loan. This loan is availed to meet the daily business needs. This loan can be availed either as a Cash Credit, Line of Credit or Overdraft facility. This could be a Demand loan, or a Term loan based on the needs of the borrower.

　　Line of Credit :

　　This is a facility extended to creditworthy customers of the bank. A Line of Credit establishes the maximum loan amount that can be used by the borrower. The borrower can then draw on the line of credit at any time, making sure that they do not exceed the maximum limit set. The borrower is charged interest only for the amount that he/she used.

　　Real Estate loans :

　　This loan provides for acquiring or creation of real estate such as office buildings, industrial or factory space, warehouses & cold storage units, retail spaces, hotels, multiplexes, gymnasiums, amusement parks, etc.

　　Asset backed loans :

　　This loan can be availed for creation of assets for business needs. The assets can be for capacity expansion, modernization, adoption of latest technological processes, short term working capital, etc.

　　Export financing :

　　This is a pre-shipping financing extended to export companies. The loan amount can be used for purchase of raw materials, packing, transportation and warehousing of goods meant for export. This loan can be availed by submitting proof of the export order or a letter of credit by the importer.

　　Equipment financing :

　　This loan can be availed to procure necessary equipment to run the business. It can used for procuring medical equipment like scanning machines, x-ray machines etc; sewing machines for a textile factory, meat processing machines, grinding machines, and other similar equipment.

　　Loan against future lease rentals :

　　This loan is mainly sought out by property owners, who have a substantial rental/lease income. They can avail loan against their forecasted rental/lease receivables. However, the lessor should be reputed corporates or government entities.

　　Finance against future receivables :

　　Loan can be availed against assured future receivables from reputed corporates or non-corporate borrowers.

　　Short-term loans :

　　Business entities can avail various short-term loans to finance their immediate business needs, while waiting for a much larger and permanent source of funding. These loans are usually for smaller amounts and smaller periods of time. These loans have higher interest rates compared to other Corporate loans due to the high risk involved.

　　The list of corporate loans offered by banks and NBFCs is quite long. Each institution has a customized set of loan products to suit individual needs. Below, we have enlisted a few well-known corporate loan products by a few leading banks.

　　State Bank of India

　　The leading lender of the country has numerous products for the business sector too. They have one of the most exhaustive list of corporate loan products to suit every need

　　Their Corporate Loan segment is divided into two –

　　Industrial Sector

　　Trade & Services Sector

　　Industrial sector focuses mainly on manufacturing and huge industrial enterprises and their loan needs. The products under this segment include

　　Working Capital financing

　　Project financing

　　Deferred Payment Guarantees

　　Corporate Term loan

　　Structures financing

　　Equipment leasing

　　Dealer financing

　　Channel financing

　　Loan Syndication

　　The Trade & Services sector includes

　　Transport financing

　　Bill financing

　　Cash credit for traders

　　Term loan for asset acquisition

　　Letters of credit

　　Bank guarantees

　　Punjab National Bank (PNB)

　　PNB is very popular among business owners for corporate loans. They offer quick and hassle-free loan processing. Their products are highly customized to suit individual needs. Some of their offering are

　　Financing for Rooftop PV Solar Power Projects

　　Loan against future lease rentals

　　Working capital financing

　　Project finance & Infrastructure financing

　　Export financing, etc;

　　HDFC Bank

　　HDFC Bank has quick and simple corporate loan processing. They offer almost all forms of Corporate loans

　　Working capital finance

　　Short term finance

　　Bill discounting

　　Structured financing

　　Export credit

　　ICICI Bank

　　ICICI Bank offers a very comprehensive set of banking solutions to its corporate. Some of their offerings are:

　　Working capital financing

　　Term loans

　　GST Business loans, etc.

　　Conclusion

　　Corporate loan is a huge segment of financing. Most banks and NBFCs offer corporate financing in India. It is totally need based and depends on various factors like the size of the business, fund requirement, creditworthiness of the customer, etc. The intended borrower should approach their nearest bank or NBFC to learn more on the products offered by them and select the right product to suit his requirements.

　　Types of Corporate Loans

　　Corporate loans are loans made to businesses for a specific business purpose. There are many types of corporate loans, and lenders change interest rates for these loans based on risk and market conditions, just like individual loans. Without these loans, most companies would not have enough funding for basic business activities. While there are many varieties, several corporate loans are more popular than others.

　　Working Capital

　　A working capital loan is funding for the business to use in its day-to-day activities. These loans are common in industries that have transactions costs for the company. Businesses may also use these loans to pay suppliers or pay employees. Working capital loans can be either secured or unsecured. Secured loans use some type of business asset as collateral so the lender can seize the asset if payments are not made.

　　Real Estate

　　Real estate loans are made so businesses can buy property. These corporate mortgages are used if businesses want to own office space instead of rent it, or if a business wants to buy land for a specific purpose, such as growing an orchard or harvesting raw materials. They are very similar to individual mortgages, but businesses may pursue further construction or development loans as well.

　　Venture

　　Venture loans are start-up loans allowing businesses to open. Lenders do not like to give out venture loans, since the odds of a new business failing are high. They prefer to see proof that the business will succeed or has the backing of an entrepreneur they have done business with before. These loans often have high interest rates and collateral requirements to make up for the risk.

　　Line of Credit

　　Line of credit loans allow businesses to borrow money from a lender at any given time, up to a certain amount of money per year. This is a common arrangement if the business has varying profits from month to month and may need extra funds to cover expenses at certain times. The size of the line of credit depends on the business and the lender's expectations.

　　Equipment

　　Equipment loans are among the simplest types of corporate loans. These smaller loans help businesses buy major assets. Manufacturers need to buy factory equipment, transporters need vehicles, and offices need computer software and hardware. These are large expenses, and many expanding businesses need a loan in order to buy such equipment.

　　Corporate loans: the basics

　　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.

　　We'll be covering:

　　What types of corporate loan are there?

　　Overdrafts

　　Term loans

　　Revolving credit facilities

　　Bridging facilities

　　Multiple option facilities

　　Swingline facilities

　　Key things to be negotiated

　　Loan repayment

　　Security

　　Corporate lending process

　　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

　　Overdrafts

　　Term loans

　　Revolving credit facilities

　　Swingline facilities

　　We explore these in more detail below.

　　Overdrafts

　　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.

　　Term loans

　　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.

　　Bridging facilities

　　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.

　　Swingline facilities

　　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.

　　Loan repayment

　　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.

　　Security

　　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.