Private industry is characterised by its adherence to the profit motive. Managers must weigh up the profitability of two conceptually different, yet often confused sources of financing — corporate loans and corporate bonds. This article will examine corporate loans and bonds in detail, highlighting their differences and synergies.
Corporate loans are borrowings directly from a bank or group of banks; banks grant an amount to the borrower in exchange for regular payments of interest and return of capital at maturity.
Corporate loans often involve a single borrower and a small number of banks (lenders). Having only a few points of contact facilitates easy communication between borrower and lenders. Hence, corporate loans are flexible, tailored forms of financing which can adapt to company performance over time.
Corporate bonds are debt instruments sold on public markets. Similarly, the issuer borrows an amount from investors in exchange for regular interest payments and the promised return of capital at maturity. Borrowing from a large number of lenders makes bonds less flexible than loans. However, the public markets are often cheaper.
As noted above, corporate loans have greater flexibility — borrowing from a smaller number of lenders facilitates more accessible communication & thus, re-negotiation. Companies in poor financial health find this flexibility provided by corporate loans more valuable
As with all investments your capital is at risk. WiseAlpha members purchase Notes which are fractions of individual corporate bonds.