What is a corporate loan?

What is a corporate loan?

When we talk about corporate loans, this is a similar concept as personal loans. The only difference between these two is that corporate loans are made from a bank to a company, whereas personal loans are from a bank to an individual. In this case, corporate loans deal with substantially larger sums of money that, to an extent, need protection. Different forms of corporate loans exist; these are structured finance, asset-based loans, and cash flow loans.

Asset-based loans are debt secured by some kind of valuable collateral. Mortgages are popular asset-based loans for personal debt financing. However, lending companies are most likely to use any expensive asset, whether it’s real estate, intellectual property or company-owned equipment. Asset-based loans tend to be more secure since the lending company has protected itself by ensuring there is a balance between the amount of the loan to be given out and the value of the asset.

For structured finance, different loan forms exist that have structures in place to make an attempt at minimizing risk. For instance, the tranching form has different securities that are further classified into segments mainly to allow different investment groups to get an idea of the risk profile of the loans.

The structured corporate lending form employs different securities like credit derivatives, collateralized debt obligations, and asset-based securities that are usually backed by government notes and collateralized funds. Every kind of security has its own sub-classes, but the entire thing can, at times, get rather complicated, but then, the idea here is to lower the lenders’ risk.

A corporate loan can, at a times, take the form of an investment termed as a straight cash flow loan to help maintain the liquidity of a business. It is said to be the most vulnerable lending form in the market as it is unsecured by any real guarantee. Learn more about these loans before you decide on the best option to go with.