What Is Corporate Lending and How Does It Work?

Corporate lending involves financial institutions providing funds to businesses rather than individuals. These loans are tailored to meet a company’s specific financial requirements, from addressing short-term cash flow needs to funding significant growth initiatives like acquisitions or asset purchases. The financial support available to businesses varies based on factors such as their size, industry, and whether they are a startup or an established entity. Corporate lending provides the necessary capital for new projects, operational stability, and managing daily expenses, allowing companies to invest in equipment, expand facilities, and remain competitive.

Types of Corporate Loans

Businesses seeking capital have various loan types available, each designed for distinct financial needs and repayment structures.

Term loans provide a business with a lump sum, repaid with interest over a predetermined period through regular installments. These loans suit long-term investments like purchasing major assets, financing expansion, or consolidating debt.

A business line of credit functions similarly to a credit card, providing access to funds that a business can draw upon as needed, up to a specified limit. Interest is charged only on the amount borrowed, making it an efficient solution for managing fluctuating cash flow, covering unexpected expenses, or addressing working capital needs.

Asset-backed loans use a business’s assets, such as accounts receivable, inventory, machinery, equipment, or real estate, as collateral. This financing allows companies to leverage existing assets to secure funding. Lenders assess asset value to determine the loan amount, with the advance rate calculated as a percentage of the asset’s worth.

Bridge loans offer short-term financing, from a few weeks to three years. They serve as a temporary solution until a business secures more permanent financing. These loans are used in scenarios like mergers and acquisitions or real estate transactions, providing quick access to capital, though often at higher interest rates due to their short-term nature and risk.

Project finance loans fund large-scale, long-term infrastructure or industrial projects. These loans are non-recourse or limited-recourse, meaning repayment depends on the project’s cash flow, not the sponsors’ creditworthiness. This specialized financing is complex, involving multiple lenders and extensive agreements to mitigate project risks.

Sources of Corporate Lending

Commercial banks are a primary source of corporate lending, from large national institutions to regional and community banks. They offer loan products like term loans, lines of credit, and commercial mortgages, catering to businesses of various sizes. Banks prioritize established businesses with strong financial histories, requiring comprehensive documentation and collateral.

Credit unions provide business loans to their members, offering competitive interest rates and personalized service due to their not-for-profit structure. They are a suitable option for small to medium-sized businesses, providing commercial real estate financing, equipment loans, and lines of credit. Membership is a prerequisite, requiring specific criteria and opening an account.

Non-bank lenders provide corporate financing, offering alternative solutions outside traditional banking channels. This includes private debt funds and specialty finance companies that may offer more flexible terms or cater to businesses with unique funding requirements or less-than-perfect credit profiles. While these lenders offer quicker approvals and more tailored products, their interest rates can be higher than conventional bank loans.

Government-backed programs, such as those offered by the U.S. Small Business Administration (SBA), facilitate access to capital for small businesses by reducing risk for lenders. SBA loans, including the 7(a) and 504 programs, feature lower interest rates, longer repayment terms, and more flexible collateral requirements than conventional loans. These programs are delivered through approved lenders, supporting various business purposes like working capital, equipment purchases, and real estate acquisition.

Information Needed for Corporate Loan Applications

Preparing a corporate loan application requires specific business and financial information to present a comprehensive view to lenders.

Businesses must provide general information, including their legal structure (sole proprietorship, partnership, corporation, or limited liability company), company history, ownership structure, and operational industry. A well-developed business plan, encompassing an executive summary, market analysis, management team biographies, and financial projections for at least three to five years, is a core requirement.

Lenders emphasize financial statements to assess a business’s health and repayment capacity. Applicants must submit historical financial statements, covering the past two to three years, including income statements, balance sheets, and cash flow statements. The income statement reflects revenue, expenses, and profitability; the balance sheet provides a snapshot of assets, liabilities, and equity. Cash flow statements illustrate cash movement, highlighting liquidity and operational efficiency.

Credit history, both business and personal, is a critical component. Lenders review business credit reports from agencies like Dun & Bradstreet, and personal credit reports of principal owners, to evaluate past financial behavior and repayment reliability. Information regarding existing debt, including a debt schedule outlining current obligations, is necessary to assess the business’s overall leverage.

Collateral details are required for secured loans, where specific assets are pledged as security. This includes appraisals for real estate, lists of equipment with estimated values, and aging reports for accounts receivable. Lenders prefer assets that are stable in value and easily marketable. Legal documents like articles of incorporation, bylaws, operating agreements, and business licenses or permits must be included to verify the business’s legal standing and compliance.

Specific information detailing the loan’s purpose is required. This includes a clear explanation of how funds will be used, such as for purchasing equipment, funding a construction project, or increasing working capital. If for a specific project, detailed project plans, cost estimates, and purchase agreements are requested to justify the funding amount.

The Corporate Loan Application Process

The corporate loan application process begins with initial inquiry and submission. Businesses submit their application online, in person, or through a loan officer. Following submission, the lender provides a confirmation, signaling the start of their internal review.

The next stage involves comprehensive underwriting and due diligence. Financial analysts and credit officers evaluate all submitted information, including financial statements, credit reports, and business plans, to assess the business’s financial health, operational viability, and risk profile. Lenders may request additional details, clarifications, or conduct site visits and interviews. The underwriting process determines the business’s capacity to repay the loan and its appropriate terms.

Following due diligence, a decision is made regarding loan approval. If approved, the lender issues a term sheet or a formal loan agreement. This document outlines the proposed loan terms, including interest rate (fixed or variable), repayment schedule, covenants, and collateral requirements. The borrower should review these terms, potentially with legal and financial advisors, to ensure alignment with their business’s financial strategy and capabilities.

Upon acceptance of the loan terms, the closing process commences. This involves the borrower signing all legal documents, including promissory notes, security agreements, and any personal guarantees. Any pre-funding conditions, such as establishing specific bank accounts or providing additional insurance certificates, must be fulfilled before funds are released. The final step is the disbursement of funds, where loan proceeds are made available to the borrower, through a wire transfer to their business bank account.

Following disbursement, businesses have ongoing reporting or compliance requirements stipulated in the loan agreement. This may include submitting periodic financial statements, demonstrating adherence to financial covenants, or providing updates on the use of funds. Maintaining open communication with the lender and fulfilling these post-closing obligations preserves the lending relationship and ensures continued access to financial resources.