Bank Loans, Commercial Paper, and Security

Bank Facilities

Sources of capital provided by banks through debt instruments that must be repaid with interest

Use of security on term loans

Key aspect of long-term borrowing

Flexibility

Availability
Relationship-based

Cost

Basic features of bank facilities as a source of capital

Bank Loan

A borrowed amount from a bank that must be repaid with interest, often offering flexible repayment terms

Commercial Paper

A short-term debt instrument issued by large, highly-rated corporations as an alternative to bank loans

Term Loan

A loan with a fixed repayment schedule, often used to purchase long-term assets such as equipment or property

Security (Collateral)

An asset pledged by the borrower to secure a loan and protect the lender from default

Amortization

The process of repaying a loan through regular, scheduled payments of both principal and interest

Restrictive Covenants

Conditions included in a loan agreement that the borrower must comply with to protect the lender’s interests

Flexibility (in Bank Loans)

The ability of bank loans to be customized in repayment terms to suit the borrower’s specific needs

Availability (of Bank Loans)

The greater accessibility of bank loans to a wide range of businesses, including smaller or less-established firms

Relationship-Based Lending

The reliance on the borrower’s established relationship and reputation with the bank to gain access to funds

Cost (of Bank Loans)

The interest rate or total borrowing cost, determined by the borrower’s creditworthiness and whether the loan is secured

Secured Loan

A loan backed by collateral, giving the lender the right to claim the asset if the borrower defaults

Unsecured Loan

A loan not supported by collateral, relying solely on the borrower’s credit standing

Medium-Term Financing

Financing with repayment typically lasting one to five years, often involving term loans

Long-Term Financing

Financing exceeding five years, usually used for acquiring large assets or long-term investments

Fixed Repayment Schedule

A structured plan where the borrower repays principal and interest on set dates over the term of the loan

Debt Instrument

A financial tool representing a loan made by an investor to a borrower, such as bonds, notes, or commercial paper

Capital Source

Any means through which a business obtains funding to finance its operations or investments

Creditworthiness

A borrower’s ability and likelihood to repay a debt based on financial stability and history

Debt-to-Equity Ratio

A financial metric comparing total debt to shareholder equity, used in covenants to monitor borrower stability

Lender’s Protection

Safeguards like collateral and covenants that reduce the risk of borrower default

Borrower’s Obligation

The borrower’s duty to repay borrowed funds with interest and comply with the terms of the loan

Interest Rate

The cost of borrowing money, expressed as a percentage of the principal loan amount

Short-Term Financing

Funding with a repayment period of less than one year, commonly through instruments like commercial paper

Corporate Credit Rating

An assessment of a corporation’s credit risk, determining its ability to issue commercial paper

Financial Relationship

The ongoing partnership between a borrower and lender, influencing loan accessibility and terms

Collateralized Loan

A loan that requires specific assets as security to minimize lender risk

Uncollateralized Loan

A loan granted without any pledged security, relying on trust and borrower credibility

Amortization Schedule

A table detailing periodic payments, showing portions that go to principal and interest

Loan Covenant

A binding clause in a loan contract dictating what the borrower can or cannot do during the loan term

Debt Financing

The process of raising capital through borrowing, requiring repayment with interest

Bank Facility

A financial arrangement allowing a borrower access to credit under agreed terms and conditions