What is “Corporate Lending”?
Corporate lending refers to the loans given by financial institutions, commonly banks, to companies (instead of individuals – retail lending) to fund their businesses. The loans are typically much bigger than retail loans and funding is generally provided by the larger banks who are lending specialists. Corporate lending is tailored to specific business requirements – these can range from short-term cash flow issues to larger-scale acquisitions, growth projects or general refinancing of existing debt. The structure of the loan depends on the specific requirement and the lender will assess the risk associated and this will help define the loan details such as the size, the lenders (single or consortium), interest rates, and repayment structure.
Key Learning Points
- Corporate lending refers to loans to companies (rather than individuals) typically from larger financial institutions
- Corporate lending is tailored to the funding requirement of the business – and covers a variety of situations from short term cash flow support to funding longer-term growth plans
Types of Corporate Lending
There are different types of corporate lending that include asset-based lending, structured finance, and cash-flow lending.
Asset-based lending: in this type of lending, loans are given to companies that are secured against some type of collateral or asset (i.e. secured loans), such as a company’s real estate, equipment, or intellectual property. Asset-based lending is a form of secured lending that enables companies to obtain loans from financial institutions against collateral.
Structured finance: is a form of financing that is available to companies with complex financing requirements, which cannot be met by the conventional or traditional forms of bank loans. Traditional lenders do not typically offer this kind of finance (i.e. structured financial products) to companies.
Typically it is investors, rather than traditional lenders, who provide structured finance to companies. This is because such finance is usually required for major or significant inflow of capital into a company or business or to meet any substantial financial requirements. Essentially, structured finance is an alternative source of financing where more traditional borrowing options will not work.
Structured finance is a complex form of financing and is usually used on a scale that is too large for a simple or traditional loan product or bond. In structured finance, securitization is typically used – where non-tradable assets are packaged and then converted into financial security. Thereafter, it can be sold to institutional investors.
Structured finance is available to companies with complex financing requirements. Cash-flow lending is a form of unsecured lending and can take place via the commercial paper market. In this form of lending, money is lent typically to only well-established companies with excellent credit ratings.
The various types of structured finance products. The same include syndicated loans, collateralized bonds obligations, collateralized debt obligations (CDO’s), collateralized mortgage obligations, credit default swaps, and hybrid securities.
Collateralized debt obligations (CDOs), an example of a complex structured finance product, are bundles of loans or packages of the same – auto loans, credit card loans, corporate loans, or mortgages (i.e. a single product) that are sold by banks to institutional investors in the secondary market. For the creation of a CDO, a vehicle for this purpose (Structured Investment Vehicle) has to be established by a financial institution.
Cash flow lending: this type of financing can take place via the commercial paper market, where money is lent (unsecured) to well-established companies by large institutions. It is usually to enable them to meet immediate cash requirements for purposes such as payroll, keeping the business liquid, or financing infrastructure. Given that these are unsecured loans, they tend to only be given to very stable and well-established firms which have an excellent credit rating. The higher credit rating implies a lower risk of defaulting on payments by the issuer or lower credit risk.