Banks lend money directly to companies through term loans and revolving credit facilities, charging a base rate plus a risk spread. They also offer specialized financing: trade finance for cross-border purchases, receivables financing to cover cash-flow gaps, asset finance for equipment, real estate finance for property, and project finance tied to construction milestones.
Chapters
How banks work, part 6: debt issuance. In the previous video in our mini-series on how banks work, we focused on how banks play a pivotal role in helping companies raise money by facilitating a successful IPO. In this video, we are looking at the role banks play in the other important element of a company's capital structure: debt. In order to understand the role banks play in financing companies, we will divide bank products into issuance and facilitation. When a bank issues a debt product, it is using its balance sheet to provide the funds for the company. In each of the following products that we'll discuss in this video, banks make money through charging interest and spend a lot of time looking at the risk profile of the borrower. The most vanilla form of company debt is a regular loan, which can be secured or unsecured and tends to be either fixed-term loans or a revolving credit facility. Term loans tend to be issued to replace existing term loans which are close to maturity or are part of an acquisition financing package. RCFs, on the other hand, help the company manage its cash flow over the course of a business cycle. The interest payable by the company will be the reference base rate plus a percentage, which represents the perceived risk of the borrower. Now, depending on their context and profile, companies have a wide range of other debt products issued by a bank. For example, if I have purchased products in one country and need a bridging loan to cover the cost of purchase before selling in my home country, I will use trade finance. On the other hand, if I have sold a lot of products but have given generous payment terms to my customers, I might require receivables financing to bridge the gap between product sale and cash received. If I want to buy a fleet of trucks or any other long-term assets, I will likely use asset finance, borrowing against the value of the asset. If instead of buying a fleet of trucks, I'm looking to buy property, I will want to access real estate finance. And finally, if you are contemplating a If you are funding a large capital-intensive project, for example, building a new manufacturing plant, you might want to access project finance, which pays out loans in tranches, unlocking a new tranche once predefined project milestones have been met. Most of these activities are executed by the commercial bank. In the next video, we will look at the role of investment banks in debt facilitation.
