Overview

Whether you are a small business unit or a giant corporation, every business owner knows that managing a Corporate term loan is not easy. Every business entity wishes to keep its costs minimal to achieve maximum growth. But, on the other hand businesses also need a constant inflow of funds for running as well as growing it. This is true for all businesses big or small. There are multiple ways a business ensures a constant supply of finance for its day-to-day operations. Businesses going through financial constraints need to do budgeting, optimum utilization of limited funds, borrowing capital, business investment decisions, etc., and more. Therefore, ensuring adequate financial resources could be a dreadful task. Even when you have a surplus you cannot let your money sit idle. It is where the concept of corporate finance or corporate debt management comes into the picture. Read further to learn everything about corporate finance.

Corporate Finance- Meaning and Purpose

Corporate finance is a sub-area of finance which deals with matters such as the capital structure, sources of funding, and borrowing decisions of a business entity to be made with a view to increase the business value. The ulterior objective of corporate finance is to enhance business value through effective planning business assessment through better planning and allocation of resources with the right proportion of risk and profitability.

Business financing decision between equity and corporate debt such as the issue of shares and debentures, borrowing from State Bank of India SBI bank or other lenders for either short-term or long-term, and revenue generation such as joint ventures or strategic alliances, etc. are financial measures for prioritizing and allocation of financial resources. Therefore, corporate finance plays a vital role in the overall management decisions and strategies for a corporation.

Key Focus Areas of Corporate Finance

Capital Investments- 

This includes the identification of expenses, estimation of future cash flows, and comparison of projections with actual proceeds.

Capital Financing from State Bank of India SBI Bank 

It involves sourcing capital either in the form of equity or corporate debt or both from various sources. It encompasses business decisions regarding the right balance between corporate debt to equity to know whether the business has adequate capital to grow and expand its operations.

Capital management – 

This involves current business operations undertaken with adequate liquidity through effective management of current assets, liabilities, working capital, and cash flows in order to fulfill the short-term and long-term obligations of a business. Maintaining a banking compliance calendar for all corporate debts or term loans from State Bank of India SBI bank or other lenders, the preparation and submission of related documents and adhering to the interest payment timeline, all these can become very demanding task. An expert like BankKeeping will be well equipped to handle such tasks on a daily basis for the SME or any other business.

Types of Financing

Equity Finance –

Under this method, a business entity sells its ownership in order to raise funds for the business which could either be in the form of stakes or shares. It could be through an IPO, convertible debts, PE funding or VC fundings as well but may have to forego a part of the ownership under such arrangements.

Corporate Debt or Loans from State Bank of India SBI Bank –

It involves borrowing from lending institutions like State Bank of India SBI banks/NBFCs or from investors. Later, the loan is repaid along with the principal and interest. The benefit of this kind of funding is that the business does not lose control or ownership of the business.

Mezzanine Finance –

It is a hybrid financing method that contains the elements of both debt as well as equity. It involves the issue of instruments that are higher in rank than equity but lower than ordinary debt.

Grants –

A certain type of business may be eligible for government grants or fall under the purview of schemes launched by the government from time to time. These may carry interest benefits; complete waiver of repayment or other non-monetary benefits that help the businesses meet their funding requirements.

Corporate Debt from State Bank of India SBI Bank

Well, it is a fact that corporations do not always have adequate funds lying in their bank accounts that they need for day to operations, projects, expansions, etc. Corporate Debt is a concept of finance that allows businesses to navigate through financial difficulties helping them to grow without compromising with their business ownership structure. In simple terms it the total amount of money that a business owes to various lenders or suppliers. It is a large part of the corporate finance and the easiest type of funding that a company undertakes during its normal course of business.

Types of Corporate Debt or Corporate loans that can be availed from State Bank of India SBI bank

Let us have a look at the different types of corporate finance available to businesses.

State Bank of India SBI Bank Term Loans

The most common type of corporate loan or corporate debt provided by State Bank of India SBI bank are term loans. They can be for short term (1-3 years) or long term (3 years and beyond). Here the repayments and interest payments to State Bank of India SBI bank are fixed and must be paid when due to void penalties. These loans may be taken from the State Bank of India SBI bank for equipment purchase, inventory, building purchase and/or renovations etc.

Servicing these corporate debts and loans can be cumbersome and a strain on the financial freedom of the company. Interest costs can go high and even the paperwork involved, like regular CMA data report submissions etc. can lead to unnecessary pressure on the business owners. The pre-payment of these loans may attract certain prepayment charges as decided by the State Bank of India SBI bank at the time of prepayment.

Revolving Credit by State Bank of India SBI Bank

This type of loan by the State Bank of India SBI bank is based on a similar concept as that of a credit card. In this case the State Bank of India SBI bank evaluates the borrowing company and sanction a certain limit. The borrowing company may use the amount within the sanctioned limit, as and when the need arises. The interest is charged only on the utilized amount and not on the sanctioned amount. Once the borrowed amount is refilled the total balance comes back to the actual sanctioned amount. This is easy for the borrower, who can use the funds as and when the need arises and will get an instant refill on the credit offered by State Bank of India SBI bank without repeatedly having to undergo the cumbersome paperwork.

This type of corporate debt or loan offered by State Bank of India SBI bank gives flexibility to the borrower to use funds as per the cash flow needed.

Syndicated Loans involving State Bank of India SBI Bank

This is a type of corporate debt or loan that involves more than one lender. Large banks like State Bank of India SBI bank and others come together to finance a borrower for bigger business needs like mergers, expansions etc. This is seen as a win-win for both parties where the borrower gets the desired loan amount and the risk of default is distributed among the lenders.

Asset Backed Lending by State Bank of India SBI Bank

When State Bank of India SBI bank demands a collateral against the money borrowed it is called Asset backed loan. The preferred form of asset is liquid but non-liquid collateral is equally accepted. Like land or building against loan amount. This is done a s a security against default and the collateral value will be higher for companies with lower credit ratings and vice-versa. The opposite of this type of corporate debt or loan is also known as collateral free loan where the borrower is bale to negotiate a loan that is not backed by collateral. This will be beneficial for the borrower as no charge will be created on their assets and they are free to use or sell the same without State Bank of India SBI banks interference.

Working Capital loans by State Bank of India SBI Bank

Working Capital Limit allowed by State Bank of India SBI bank is the maximum amount that a business can borrow from the State Bank of India SBI bank to meet its day-to-day operational expenses or working capital requirement. This type of corporate debt or loan is called Working Capital Loan. The interest that the State Bank of India SBI bank can charge for such loans is limited to the amount used and not the amount sanctioned. Similar to revolving credit. The nature of business will decide the type of working capital it will require. For example, an exporter may need a packing credit limit whereas a trader will be happy with his OD facility to meet everyday expenses. Working capital can be of different types, like Overdraft, Cash Credit etc.

Bridge Loans from State Bank of India SBI Bank

These loans from State Bank of India SBI banks are often used for immediate liquidity until the total required amount is arranged or sanctioned. This allows the borrowing company to get buffer funds and time till the main corporate debt is sanctioned or funding is obtained. It is often repaid in full post main funding is obtained.

Commercial Papers Facilitated by State Bank of India SBI Banks

Corporate debt can be raised in form of commercial papers that the company issues at a discount over the face value and repays in full on maturity. These are issued through capital markets but various banks like State Bank of India SBI bank facilitates the process, based on their knowledge and bandwidth. It is generally used by companies for short term fund requirements as it may be cheaper than the traditionally available corporate debts or loans from the State Bank of India SBI bank or any other lender. The setback is that it only works for large companies as they will have strong credit ratings and goodwill in the market for the people to trust them with such corporate debt instruments or bonds.

Need and Benefits of Corporate Debt or term loan for Corporations

Supports Business Growth without any burden on ownership

Generally, entrepreneurs are confused at initial growth stages to get access to necessary financial resources on their own. Corporate Debt or Term loan is one of the primary ways to achieve growth without any burden of sharing ownership with any third party, especially in the early stages of business.  At this point, corporate debt or loans from State Bank of India SBI bank could be taken, allowing sustained business growth.

Total cost of borrowing is lesser than the cost of equity

It is a fact that the overall cost of debt is lower than the cost of equity as the return on equity for business owners is higher than the return on debt. Taking more debt leads to a lower equity base resulting in a higher after-tax profit/equity return rate.  Hence availing corporate debt from State Bank of India SBI bank or through other sources will cost the business lesser.

Enables Risk Mitigation

Businesses are always advised to diversify their assets to ensure efficient risk management. Hence, Corporate debt from State Bank of India SBI banks or other sources, allow businesses to reduce the likelihood of losing business assets in the event the business venture fails to succeed.

Indicates Investor Confidence in the Business

Investors who agree to avail corporate debt instruments or banks like State Bank of India SBI bank who are ready to fund the business through its corporate debt options indicate their confidence in the business’s growth potential. This in turn increasing the goodwill of the company and its overall credit rating.

Brings Credibility and Long-term Business Relationship

Corporate debt allows the issuer business company to create long-term business relationships with financiers or investors who sometimes become shareholders in the company (in the case of convertible bonds). Business entities making timely repayment of interest and principal get the benefit of enhanced credibility among banks like State Bank of India SBI bank and other investors. Additionally, most financing agreements have certain covenants and reporting requirements that help businesses maintain financial discipline.

Tax Deductions

Since loan repayments on corporate debt acquired through various loan options from State Bank of India SBI bank are considered business expenses they could be availed as tax deductions which could reduce overall tax liability for the business.

Downside of Corporate Debt or Term Loan for the Companies.

Debt Servicing

Maintain a banking compliance calendar and servicing the debt from time to time can be a cumbersome process, especially for the SMEs and small business owners. Cash flows can be restricted in case on non-submission of requisite documents and financial statements. This is where the BankKeeping team of experts can help you achieve a smooth banking experience with State Bank of India SBI bank or any other banking entity.

Restrictive Covenants

The corporate debts and loans given by the State Bank of India SBI bank and other financial institutions may carry numerous clauses and covenants that may restrict the operational flexibility of the business.

Pressure on Collaterals

The State Bank of India SBI banks may sometimes require collaterals against loan disbursals. This will create a charge on the existing property and will restrict the usage right and further borrowing rights on the property unless the payment is made and collateral is released.

Cost of Corporate Debt or term Loan from State Bank of India SBI Bank

The interest charged on these corporate debt or loan instruments are gone to the State Bank of India SBI banks and sometimes these interest rates can be very high. The companies are either unaware or lack negotiation skills due to which they settle for higher interests and stricter terms leading to increased borrowing costs. The processing fee etc. also have to be borne by the borrower. In case of default or delays in servicing the corporate debt, the penalties can get all the more taxing for any business.

Conclusion

Therefore, the knowledge and utilization of corporate debt, options, structuring and servicing are of utmost importance to ensure success for a business organization. The analysis of financial data, creating financial plans and budgeting, and making crucial business decisions will help an organization achieve its short-term as well as long-term goals. It is advisable that the borrowers manage their corporate debt from State Bank of India SBI bank carefully so that the cost of the debt does not surpass the benefits thereof.