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Corporate lending is a broad term that encompasses a variety of loans made to businesses. Loans of this type typically have specific purposes, including project, asset-based, cash flow, or working capital loans. A company can apply to any business that meets specific lender requirements. The different forms of corporate lending certainly have different requirements depending on the circumstances.
Project loans are among the most common needs for corporate lending. A business that starts new operations or makes a large shift in a department may require outside funds. A company’s corporate finance department may need to prepare a report that dictates the needed funds. The reports often define the purpose and specific use for the capital. Lenders use this information to make decisions when granting the loan.
An asset-based loan is typically for a specific item a business requires to run operations. For example, a production firm may need new equipment to manufacture goods. These loans may also be bonds issued by the business. Corporate lending that includes bonds is quite typical for larger or publicly held companies. Bonds give a business many options in terms of flexibility and requirements for repayment.
Cash flow loans are necessary when a company is unable to generate enough cash through normal operations. Credit lines are a common form of corporate lending for this purpose. A credit line allows a company to draw funds as needed, especially during times of low cash flow or collections. Companies can easily repay the credit line when cash comes in from the business. A common example here is accounts receivable; when a company fails to collect receivables in a timely manner, it needs easy-to-get cash to pay current bills due.
Working capital loans are similar in nature to cash flow loans. The purpose of the loan or credit line is different, however, than simply using the funds for basic cash needs. Working capital corporate lending involves funds for inventory or other short-terms assets needed by the company. These loans are for a short time and fall under a company’s current liabilities. Accountants typically prepare information on a company’s working capital.
Corporate lending often has specific rules and guidelines. Internally, a company must ensure that additional loans do not overextend the business. When this occurs, the business must attempt to fund operations through cash rather than loans. Interest paid on loans typically reduces the financial returns a company generates.