Bank Loans
Types of bank loans
- Commitment — how the bank agrees to lend
- Evergreen credit — no fixed end date; continuously renews, always accessible
- Revolving credit (revolver) — draw, repay, redraw up to a set limit
- Maturity — when the loan must be repaid
- Bridge loan — short-term, bridges a gap until permanent funding arrives
- Self-liquidating — repaid by the cash flows the loan itself finances (e.g. inventory → sale → repayment)
- Term loans — fixed repayment schedule over a set period
Rate of Interest:
- fixed - stays the same for the life of the loan
- floating (e.g. SOFR (daily interest rate, published by the Fed) + spread (bank compensation for credit risk))
determines interest rate risk for the borrower (may increase)
Syndicated Loans — loan too large for one bank; a syndicate of banks shares the risk, led by an arranger
Commercial Paper and Medium-Term Notes
Raise money directly from markets instead of through banks.
Commercial Paper companies borrow money from investors by issuing short-term unsecured debt (your own “banknotes”=money basically). Very short maturity typically.
Medium-Term Notes Maturity 1-10 years usually. Like bonds they pay interest - issued more flexibly rather than in one big offering.
This is useful for disintermediation - no banks that has to assume a risk by giving a loan.