4.1 Introduction 85makes a loan available to the borrower subject to certain conditions. The borrower
might not have any obligation to borrow. Under a loan agreement, however, the
borrower has agreed to borrow money, and is obliged to draw down.^4
Loan facilities can be with one bank or made available by a group of banks (a
syndicate; for syndicated loans, see section 4.7 and Volume II).
The most basic loan facility is the “term loan”. Term loans vary from the short
term (bridging finance, working capital, trade finance) through the medium term
(two to five years for working capital, some capital expenditure) to the long term
(project finance, capital expenditure). Term loan facilities provide that a bank is
committed throughout a specified period (the commitment period) to make ad-
vances upon request by the firm up to a maximum amount, with all the advances
being repayable together. A term loan can have a fixed repayment schedule with a
specified maturity date and the advances repayable either in instalments or in one
lump sum (bullet repayment). Alternatively, the firm can borrow for a selection of
periods, repay and borrow again (a revolving loan). The facility may be available
in a single currency or in a selection of currencies with an ability to switch from
one to another (a multi-currency option).
The facility can be an advance facility or a bill or acceptance facility. An ad-
vance facility is a facility where the banks make cash advances to the borrower. A
bill or acceptance facility involves the drawing of bills of exchange on the banks.^5
The firm can borrow either at interest or at a discount or premium.
There can be distinctions based on the maturity of the loan facility. A swingline
facility is a committed facility providing for very short-term advances (typically
up to seven days), and is generally put in place to support a commercial paper
programme.
The purpose of a swingline facility is twofold (Fuller): “First, if the firm has to repay a
tranche of commercial paper and does not want to issue a new tranche on the repayment
date because of what it sees as temporarily adverse market conditions, it can repay through
the use of the swingline facility and issue the commercial paper (and thereby repay the
swingline advance) a few days after. Second, it reassures potential purchasers under the
commercial paper programme that the company will be able to repay them on maturity re-
gardless of market conditions.”^6
Loan instruments. It can be seen that there is a wide range of loan instruments. For
example, the firm can turn to a bank and agree on a facility. A medium-sized firm
can raise short-term debt in the domestic money markets. A large firm can issue
commercial bills or commercial paper. A large firm can also issue debt securities
such as corporate bonds into the domestic primary market, or into the international
market.
(^4) Adams D, Corporate Finance: Banking and Capital Markets. LPC 2003/04. Jordans,
Bristol (2004) p 39.
(^5) Fuller G, Corporate Borrowing. Third Edition. Jordans, Bristol (2006) paragraph 2.5.
(^6) Ibid, paragraph 2.6.