Updated to take account of the new financial assistance rules under the Companies Act 2006.
A quick guide to some of the common types of loan available to a company and to some of the points to bear in mind when negotiating a loan. This guide is aimed at those who have little or no experience of corporate loans.
This is one of a series of quick guides, see Quick guides.
This quick guide also links to a multi-jurisdictional guide to finance and a detailed note on corporate loan facilities in the United States.
Each type of loan has particular characteristics which suit different purposes, for example, short-term borrowing or finance for a large acquisition. Companies need to make sure that the loan they are taking out is suitable for the purpose of the borrowing.
There are various types of loan (or loan facility or credit facility). For example, overdraft, term loan facility and revolving credit facility.
In addition, a loan may be:
An overdraft (or working capital facility) is for solving short-term cash flow problems. It is generally an uncommitted facility. This means that the lender (which may be a bank or other financial institution) has discretion whether to lend, even after the overdraft facility agreement has been executed. They are usually repayable on demand, making them unsuitable for certain purposes, such as funding a major acquisition. The lender will not generally call in the overdraft unless the borrower's financial position or activities give it cause for concern.
The advantages of an overdraft are that it is simple and usually available from a company's existing bank. The disadvantages are:
A term loan facility:
The advantages of a term loan facility are that the borrower can control the amount of its borrowing and therefore how much interest it pays. It also has certainty of funds and a fixed repayment schedule. The disadvantage is that any amount repaid cannot be re-borrowed.
This is a committed facility that provides a maximum amount that can be borrowed over an agreed period. The borrower may draw down and repay advances during the term of the credit facility. Amounts repaid can be re-borrowed. The borrower can often select an interest period and fix the interest rate it pays over that period for each advance it draws. At the end of an interest period, the borrower will decide whether to repay or "rollover" the advance into a new interest period. Rolling over an advance means the advance remains outstanding as far as the borrower is concerned. Further advances can be drawn down at any time during the availability period (commonly almost as long as the term of the credit facility) with different interest periods running in parallel.
The advantage of a revolving credit facility is that it is flexible. The borrower can draw down as much or as little money as it requires at any time, and repay outstanding advances that are no longer required. The disadvantages are that commitment fees may be high. There may also be restrictions such as minimum notice periods before an advance is made, or limits on the amount that may be drawn at any one time.
A bilateral loan involves two parties, namely the lender and the borrower. Bilateral facilities are common in the case of small term loan, revolving credit and overdraft facilities.
In a syndicated loan, two or more lenders each lend a proportion of the money. They are common for larger deals where a lender may not be willing and/or able (for example, for regulatory reasons) to lend the whole amount.
Depending on the borrower's creditworthiness, a lender may require a comprehensive security package from the borrower (and in acquisition financing, the target itself) as well as any material subsidiaries. Security may attach to certain or all of the assets of the security providers. When granting security, the borrower should check for each security provider:
Most lenders base their loan documents on the Loan Market Association's (www.practicallaw.com/6-107-6779) (LMA) standard forms and expect many of the LMA clauses to be treated as market standard. Nonetheless, the borrower's key objectives when negotiating the loan will be to: