Corporate Finance in Business Orgs

Question 1

Types of Debt

Answer 1

1. Term Loan - loan made to business, typically by a bank, that calls for regular periodic payments of interest & principal, usually over a period of 1-10 years.
2. Line of Credit - loan that a business can draw down when needed. Interest owed on amounts company draws down baed on how long they are outstanding & lender may also charge a “commitment fee” for making the line available. AKA revolver.
3. Equipment loan - loan made so business can buy capital equipment (equipment business uses to produce products/provide services that has a lifespan of years). Lenders generally willing to lend a business 50-80% of the value of capital equipment securing the loan, depending on the lender’s assessment of how easy it would be to resell equipment.
4. Equipment lease - financing transaction where finance company buys piece of equipment selected by business & leases it to business. May not be considered debt for accounting purposes.
5. Inventory loan - generally 50% of inventory value
6. Mortgage loan - secured by mortgage, normally up to 85% of value of real estate securing it.
7. Subordinated debt - loan or debt instrument ranking below other debt.
8. Accounts receivable loan - loan secured by a business’s accounts receivable, up to 85% of the value of tis accounts receivable.

Question 2

Types of Debt P2

Answer 2

1. Syndicated loan - loan funded by a group of lenders. Bank usually serves as lead lender and lines up other lenders. Lead lender negotiates terms & loan agreement w/borrower, monitors borrower’s compliance. Used to spread risk of default across multiple lenders.
2. Corporate bond financing - issued pursuant to an indenture, which resembles a loan agreement, but is btwn the company & an indenture trustee. Any type of business can issue corporate bonds.
3. Debenture financing - debt raise by a business thru sale of debentures. Basically same as bond but unsecured by collateral.
4. Junk bond financing - debt raised by business thru sale of bonds w/credit rating below investment grade. BB+ using most scales.
5. Commercial paper - short-term, unsecured loans to companies w/high credit ratings the proceeds of which will be sued to fund “current transactions.” Maturities range from 2-270 days.
6. Trade debt AKA accounts payable - money owed to a supplier or other creditor of a business for goods or services sold. Trade creditor willing to implicitly lend money to its customers to facilitate more sales. If trade creditor becomes wary of a business paying late or concerned about a business’s trustworthiness, it may shift to cash-on-delivery model, meaning payment is due by the business at the time of delivery or start of services.