Types of Loans and Debt Securities

Loans

Contract between lender and borrower where the company borrows money and must repay it, usually with interest

Secured loan

Loan backed by company assets, so if the company defaults, the lender can sell the secured asset to recover the debt

Unsecured loan

Loan not backed by specific assets, so it is riskier for the lender and usually more expensive for the company

Main types of loans

Overdraft, term loan, and revolving credit facility

Overdraft

Short-term borrowing from a bank where the company can overdraw its current account

Overdraft purpose

Used for everyday expenses and temporary cash-flow problems

Overdraft repayment

Repayable on demand, meaning the bank can ask for repayment immediately without notice

Overdraft cost

Company pays a facility fee and interest on the amount actually overdrawn

Overdraft advantage

Flexible, quick to set up, and has fewer formalities

Overdraft disadvantage

Can be expensive and risky because repayment can be demanded at any time

Term loan

Fixed sum borrowed for a fixed period and repayable on a set date

Term loan purpose

Usually used for larger purchases, such as buying land, assets, or funding an acquisition

Term loan interest

Interest is paid at regular intervals on the amount borrowed

Term loan repayment

Can be repaid in one lump sum at the end or gradually during the term

Bullet repayment

Repaying the full loan amount in one lump sum at the end of the term

Amortisation

Repaying the loan gradually during the term

Term loan recall rule

Lender usually cannot demand early repayment unless the borrower breaches the loan agreement

Term loan document

The terms are contained in a facility agreement or loan agreement

Term loan advantage

Gives the company certainty because the money is available for a fixed period

Term loan disadvantage

More expensive and complicated to set up, and security is often required

Bilateral loan

Loan between one lender and one borrower

Syndicated loan

Loan where several lenders lend to one borrower

Term sheet

Pre-contract document setting out key loan terms like amount, term, and interest

Term sheet binding effect

Usually not binding, except for specific clauses like confidentiality

Facility agreement

Main loan agreement containing full terms, interest, undertakings, representations, and default provisions

Security document

Separate document used where the loan is secured

Debenture

Security document setting out which company assets are given as security for the loan

Security documentation purpose

Identifies secured assets and may restrict what the company can do with those assets

Revolving credit facility

Loan facility where the bank makes a maximum amount available for a set period

RCF borrowing rule

Company can borrow, repay, and re-borrow amounts as long as it does not exceed the maximum limit

RCF committed amount

The maximum amount the bank agrees to make available to the company

RCF interest

Interest is paid only on the amount actually borrowed

RCF commitment fee

Fee paid to the bank for keeping the full facility available even if the company does not borrow all of it

RCF advantage

Flexible and useful where the company needs repeated access to funds

RCF disadvantage

Can be costly to set up and commitment fees can be high

Overdraft v RCF

Overdraft is smaller and short-term; RCF is larger, more formal, and used by bigger businesses

Term loan v RCF

Term loan is one fixed borrowing; RCF allows repeated borrowing and repayment

Debt security

Financial instrument issued by a company to raise money from investors

Debt security basic idea

Company sells the debt security, receives cash, and promises to repay with interest

Investor in debt security

Investor buys the instrument and becomes entitled to repayment plus interest

Debt security simple meaning

Basically an IOU issued by the company

Bond

Most common type of debt security

Bond repayment

Company promises to repay the bond amount at maturity plus interest

Maturity date

The date when the bond must be repaid

Bond trading

Bonds can be traded between investors on the capital markets

Bond holder at maturity

Whoever holds the bond at maturity receives repayment from the company

Loan v debt security

Loan is usually borrowed from a bank/lender; debt security is issued to investors

Company raising money by loan

Company borrows directly from a lender under a loan agreement

Company raising money by bond

Company issues bonds to investors and promises repayment at maturity

Best memory hook

Overdraft = emergency cash; term loan = fixed pot; RCF = borrow-repay-reborrow; bond = company IOU