Types of Corporate Finance Loans, Made Simple

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Types of corporate finance loans - Canadatousd

Money makes the world go round and the business/ finance sector is the perfect example of this. The flow of money is essentially handled and vectored by the business centres of the world, but that’s not to say they don’t see hard times or have to make do with less money.

Matter of fact, corporate bailouts have become almost a household term, especially after the 2008 housing market crisis. This also sheds some light on older phenomenon; namely corporate finance loans. So, we ought to discuss what corporate finance loans are, and what are the types of corporate finance loans.

The nomenclature should make the pretty self-explanatory. Corporate finance loan. Money that corporations borrow to make ends meet, pay bonuses or salaries or even stay afloat. And when it comes to finance, there are a lot of types of corporate finance loans. So much so, that they are divided into two major types, which then contain the multiple subtypes. So, here goes.

Also read: Different Types of Corporate Bonds; Risk, Market Value and Security

Types of Corporate Finance Loans

As explained beforehand, there are many types of corporate finance loans, so much so, that they are divided into two major categories, which are then divided into smaller subtypes. These two major types of corporate finance loans are,

Basic Loans

Complex Loans

Basic loans include commercial, term and other types of corporate finance loans while complex loans include cash flow and working capital loans.

Basic loans:

Commercial Loans:

A commercial loan is based on a debt funding arrangement between the corporation and the lender. The corporation can have this arrangement with a financial institution, usually a bank.
The money from a commercial loan is often used for expenditures that are otherwise unaffordable for the company. They are short-term in nature and are almost always supported by some kind of collateral. Commercial loans can be acquired with flexible interest rates.
The borrower is required to present their regular financial statements. In the case of collateral, the lender may ask the borrower to maintain the collateral property. Commercial loans have high upfront prices; therefore, they are not typically borrowed by smaller business establishments.

Term Loans: 

The term corporate loan is borrowed in a specific amount with a specified repayment schedule. The interest rate in this case is floating. These loans will mature between one to ten years.
These funds are usually needed by businesses to support monthly operations and to buy fixed assets such as production equipment.

Unsecured Loans:

Unsecured loans are the types of loans borrowed without the backing of collateral is known as an unsecured loan. In this case, the loan is lent solely on the credibility of the borrower. A lender is more likely t0 prefer a borrower with high credit rating.

Acquisition Loan:

In these types of loans, the asset that needs to be acquired is determined before the loan is taken. These loans are often taken when a company does not have enough liquid capital to complete an acquisition.
Businesses are more likely to get these loans because the asset has tangible value and the funds are not induced into capital to support monthly operations.

Also read: 4 Different Types of Bonds in Business Finance

Complex Loans:

Self-liquidating Loan:

A corporate loan is borrowed from buying assets that have the potential to generate cash. The same cash is used to return the loan. This loan can be both short term and for intermediate periods of time.
The repayment and maturity schedule of such a loan are formulated to coincide with the time the particular asset will start generating income.

Asset Conversion Loan:

This type of corporate loan is based on short term. The repayment of this loan depends on converting an asset into cash. Assets like inventory and receivable are often converted into cash to repay the asset conversion loan.

Cash Flow Loan:

Cash flow loan is a corporate loan borrowed to meet day to day needs of the business. Reasons ma include seasonal changes in demand, expansion of the business or changes in the business cycle.
Cash flow loans are quite beneficial for temporary situations but in the long run, businesses have to look for alternative solutions like improving the cash conversion cycle and making the customers paying faster.

Working Capital Loan:

This is another loan to support daily financial needs of a business. It has no use in making an investment or buying long-term assets. It is rather used for paying salaries, pay wages and clearing the accounts payable.

Bridge Loans:

A bridge loan is acquired by a business to meet an existing obligation or to provide immediate cash flow for a business obligation. This loan is required until the business has secured a permanent source of financing.

Also known as interim financing, gap financing and swing loan, these are short term loans lasting up to a period of one year. The interest rates are higher and such loans are to be supported by collateral. On one hand, businesses have quite the options when it comes to corporate loans. However, it is not easy to acquire these loans.

Companies have to meet lending criteria in order to borrow the required loans. It has become even more difficult in today’s business world to get loans from traditional bank lenders. When seeking loans, businesses should search different financial institutions carefully.

Many financial institutions are quite flexible while others are not. What type of financial institution you choose may also depend on the industry of the business. It is better to choose one that is friendly towards the particular industry and offers better loan terms as well.

Once the loans are acquired, it is necessary to meet the terms from your end. This is necessary not only for legal purposes but for long term relationships with the lender as well. Whether you need startup business loans or help with acquisition finance, a good relationship with the lender can help you in the long run.

A growing and actively running business can require finding at any point. Good terms with the lender help you easily get the funds. Moreover, both parties will already have trust and know the reliability.

 

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