Corporate loans are generally high value loans and hence there are a lot of complications involved into getting them. For a corporate it becomes really difficult to ascertain if they should take on a corporate bank loan or raise money by means of additional bonds. Whether to go for them is a tough question to be answered even by the experts, it makes a lot of sense to know the different facets related to the benefits and restrictions related to these loans.
Corporate are on the lookout of loans which can help them in their short term, mid- term and the long term planning and meeting the requirements under different time horizons. When we look at the short term requirements of the corporates we find that they majorly relate to working capital requirements. Any need which arises out of the differences in the current assets and liabilities, for the payments to the suppliers, wages and salaries to the employees and so on are listed under the working capital requirements. When we look at the mid-term and the long terms requirements they are more or less related to purchase of properties for the business, investment towards setting and running a research and development wing and other similar requirements.
Categories of Bank loans
Secured loans are the ones which involve a collateral. Any asset of the company whose valuations are equal to or more than the amount of loan one applies for is referred to as collateral. When the banks approve these loans they generally possess the right to sale of the assets kept as collateral with them, in the event that the borrowers fail to repay the amount to the lenders as per the agreed terms. These loans are comparatively easier to get and the interest rates offered by the banks on them are low when compared to the other loans in the industry.
When your company enjoys a good reputation, the business fundamentals are strong and the profits show a good demand and future prospects for the company, you have all the probability of getting unsecured loans wherein there is no need to pledge any of the company assets. Other than these the credit history and the score of the company plays a major role into getting these loans. Companies which enjoy a good credit rating can easily qualify for these loans for people with bad credit and at a much better term and interest rate as compared to the ones with a lower credit rating.
Merits and demerits of Bank Loans
Which one should you go for a bank loan or issuance of bonds will be decided only on the basis of a number of factors which are listed below:
Credit standing of the borrower:
Any of the companies having a medium to average credit standing would be required to take a bank loan. These are comparatively better options when compared to the bonds as they offer a higher interest rate and are difficult to deal with.
Line of Credit
Getting a line of credit for the business needs can prove to be an excellent decision. Under this provision, the borrowers do not start with a heavy interest payment because the take small amounts of loan from the approved limit they have. This allows them to meet their current obligations related to working capital needs with ease and do not have to lose on the business credibility just because of the paucity of funds. Most of the times the companies have to risk their assets under these loans as collaterals.
A lot depends on the business environment when it comes to the selection of the loans or the issuance of bonds. When the situation is tough like in the current circumstances, it is always advisable to go for the business loans from the banks. However, it is these times when the banks put a freeze on the line of credit function and hence it really becomes a tough decision when it comes to the business loans.