What is a Corporate Loan?
A corporate loan, also known as a business loan or commercial loan, is a type of financing provided by a financial institution to a corporation or business entity. Corporate loans are typically used to fund various business activities, such as expansion projects, capital expenditures, working capital needs, inventory purchases, equipment acquisition, or other operational expenses. Corporate loans include capital investment, company expansion, working capital, administrative, and operational costs. For example, imagine a small company that wants to expand by opening an office at a new location. They need money for renovations, new furniture, and extra staff. They apply for a corporate loan from a bank and receive ₹50 lakhs to fund these expenses.
Key Takeaways:
- Corporate loans may be secured or unsecured, meaning they may require collateral or be based solely on the creditworthiness of the borrowing company.
- The terms of corporate loans, including interest rates, repayment schedules, and loan amounts, vary depending on factors such as the borrower’s credit history, financial strength, industry risk, and the lender’s policies.
- Corporate loans are an essential source of funding for businesses of all sizes, helping them manage cash flow, invest in growth opportunities, and meet their financial obligations.
Table of Content
Features of Corporate Loan
Corporate loans have several features that make them suitable for businesses looking to finance their operations, growth, or other expenses. Here are some of it’s key features,
1. Purpose: Corporate loans can be used for a variety of business purposes, such as expanding business operations, purchasing equipment, financing inventory, or even refinancing existing debts.
2. Loan Amount: The loan amount can vary significantly, depending on the lender’s policy and the borrower’s financial health and needs. Some loans can be for relatively small amounts, while others can be in the millions or billions of currency units.
3. Interest Rates: The interest rates on corporate loans can be fixed or variable. Fixed rates remain the same throughout the loan term, while variable rates can change based on market conditions.
4. Repayment Terms: Corporate loans offer various repayment schedules, which can be monthly, quarterly, semi-annually, or annually. The repayment period can range from a few months to several years.
5. Security/Collateral: Loans can be secured or unsecured. Secured loans require collateral, such as property or other assets, which the lender can claim if the loan is not repaid. Unsecured loans do not require collateral but usually have higher interest rates.
6. Covenants: These are conditions set by the lender that the borrowing company must adhere to. They can include financial ratios that the company must maintain, restrictions on further borrowing, or how the loaned funds can be used.
7. Processing Time and Fees: Corporate loans may have a processing time that can vary from a few days to weeks, depending on the lender and the complexity of the loan application. Processing fees may also be charged to cover the cost of the loan application and disbursement.
8. Flexibility: Some corporate loans offer flexibility in terms of additional drawdown options or the ability to repay the loan early without penalty.
How does a Corporate Loan Work?
1. A corporate loan serves as a financial lifeline for businesses seeking capital to fuel growth, manage operations, or navigate financial challenges. The process of obtaining and utilizing a corporate loan involves several key steps. It begins with the borrowing company submitting a comprehensive loan application to a financial institution, which details the company’s financial history, future plans, and the intended use of funds. This application serves as the initial point of contact between the borrower and the lender, setting the stage for further evaluation.
2. Once the application is received, the lender conducts a thorough assessment of the borrower’s creditworthiness and risk profile through a process called underwriting. This involves analyzing factors such as the company’s financial statements, cash flow projections, industry trends, and the presence of any collateral that could secure the loan. The lender’s underwriting criteria vary but generally aim to gauge the likelihood of the borrower repaying the loan as agreed.
3. Upon completing the underwriting process, the lender decides whether to approve the loan based on its assessment of the borrower’s financial health and risk level.
4. Once the loan agreement is finalized and signed, the lender disburses the loan funds to the borrower, typically in a lump sum or in installments depending on the loan’s purpose. The borrower then utilizes the funds to address their intended financial needs, whether it’s investing in new equipment, expanding operations, managing cash flow, or any other business-related expenses outlined in the loan agreement.
5. Throughout the loan term, the borrower is responsible for making regular payments to the lender, which typically include both principal and interest. These payments are structured according to the agreed-upon repayment schedule, which may be monthly, quarterly, or another frequency specified in the loan agreement.
6. Ultimately, upon completing the repayment of the loan, the borrowing company fulfills its financial obligations to the lender, marking the conclusion of the loan agreement. By effectively managing the loan process and honoring their repayment commitments, businesses can leverage corporate loans to support their growth, innovation, and long-term success in a competitive marketplace.
Types of Corporate Loan
1. Term Loans: These loans provide a lump sum of money upfront, which businesses need to repay with interest over a predetermined period, usually in regular monthly installments. Term loans are good for long-term investments like expanding operations or purchasing major assets.
2. Business Line of Credit: The bank offers this service to its creditworthy customers. A line of credit determines the borrower’s maximum allowable loan amount. After that, as long as they don’t exceed the maximum permitted amount, the borrower is free to use the line of credit whenever they choose. The borrower only pays interest on the amount that is used.
3. Equipment Loans: Tailored for businesses needing to buy machinery or equipment, these loans use the purchased equipment as collateral. The repayment term often aligns with the expected life of the equipment.
4. Lines of Credit: This is a flexible loan option where a business is approved for a maximum credit amount and can draw funds as needed up to that limit. Interest is only paid on the amount borrowed. Lines of credit are useful for managing working capital and handling unforeseen financial needs.
5. Merchant Cash Advances: A merchant cash advance (MCA) is a simple method to get short-term funding. In exchange for a one-time cash payment, business owners provide the lender a percentage of their future sales proceeds.
6. Commercial Mortgages: Similar to residential mortgages but for commercial properties, these loans are used to buy or refinance business premises. The property itself serves as collateral, and the loan terms can extend up to 20-30 years.
7. Invoice Financing: This allows businesses to get an advance on invoices that are due to be paid by customers, improving cash flow. The finance company advances a portion of the invoice amount and charges a fee, with the remainder paid to the business once the customer settles the invoice.
Eligibility Criteria for Corporate Loan
To get a corporate loan, the essential criteria is as follows,
1. Age of Applicant: 21 to 65 is the typical lender’s eligibility range.
2. ITR Filing: The applicant is required to file their prior year’s ITR. Based on the filed ITR, an applicant’s credit repayment capacity and monthly income are assessed.
3. Banking Stability: Lenders often review bank statements for at least six months before approving a loan.
4. Stability of the Company: To determine the development and stability of the company, lenders also review the company’s past.
5. Annual Income: Different lenders have different requirements for loan eligibility based on an applicant’s annual income.
Documents Required to Apply for Corporate Loan
When applying for a corporate loan, businesses need to provide several documents so that lenders can evaluate their application. Here’s a list of commonly required documents,
- PAN Card
- KYC Documents (Identification and Address Proof) – Aadhaar Card, Driving License, Voter Card, Passport
- 6-month bank statement
- Trade License, Establishment Certificate, or Sales Tax Certificate
- A declaration of a partnership deed or sole proprietorship
- A certified copy of the MOA (Memorandum of Association)
- An AOA (Articles of Association)
- Board resolution
Top Banks and Financial Institutions that offer Corporate Loans
Many banks and financial institutions offer corporate loans, each with its own set of terms, interest rates, and loan products. Here are some well-known entities that provide the corporate loan,
| Name of Institution | Rate of Interest (p.a.) | Max. Loan Amount (Rs.) | Processing Fee (%) | Tenure |
|---|---|---|---|---|
| HDFC Bank | 15.65% – 21.20% | Up to 50 lakhs (Up to 75 lakhs in specific locations) | Starts from 0.99% up to 2.00% (NIL for loans up to 5 lakhs for small enterprises) | 12-48 months (Flexible) |
| DHFL | Starts from 17% | Up to 20 crores (3 lakhs to 10 lakhs for small enterprises) | Up to 4% + taxes | 36 months (Flexible) |
| IIFL | 18% to 25% | Up to 50 lakhs | Up to 3% | Flexible |
| Axis Bank | 10.75% | Up to 10 crores | Up to 2% + GST | Up to 15 years (Flexible) |
| ICICI Bank | 6.00% – 22.00% | Up to 2 crores | Up to 2% + GST | Up to 7 years (Flexible) |
| State Bank of India (SBI) | 8.00% – 15.00% | Up to 50 crores | 0.5% – 1% + GST | Up to 12 years (Flexible) |
Conclusion
In conclusion, corporate loans serve as vital financial instruments for businesses, providing essential capital for growth, operations, and strategic initiatives. From initial application to loan disbursement and repayment, the process of obtaining and utilizing corporate loans involves careful negotiation and financial management. By leveraging corporate loans responsibly, businesses can navigate challenges, seize opportunities, and drive sustainable success in today’s dynamic business landscape.
Corporate Loan – FAQs
What do you mean by corporate loan?
A corporate loan is a loan which is provided to businesses rather than private individuals. This sets corporate loans apart from personal loans. Corporate loans are often referred to as business loans or enterprise loans.
What is the tenure of corporate loan?
Flexible tenures. Most lenders offer a flexible tenure for the repayment of the loan which usually ranges between 12 months and 48 months. Some lenders even provide loans for a tenure of 60 months. This allows the borrower to grow his or her business with ease.
What is a corporate loan book?
Corporate Loan Book means the corporate and commercial loan book overseen by the Corporate and Markets (CAM)/Corporate and Business Banking (CABB) directorates of Co-op Bank.
What are the three components of a corporate loan?
Loan Amount (Principal) Collateral, Down Payment, Interest & Fees.