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Corporate lending is essentially the same thing as a personal loan, except instead of being made from a bank to an individual, it is made from a bank to a company. As a result, the amounts of money being dealt with tend to be substantially larger, and some of the protections are a bit different. There are a number of different forms of corporate lending, including asset-based lending, structured finance, and cash flow lending.
Asset-based lending is when the loan given is secured by means of some sort of asset. In personal loans, mortgages are probably the most well-known form of asset-based lending, but companies are more likely to use real-estate, intellectual property, or expensive equipment. Asset-based lending is one of the more secure forms of lending, since the bank lending the money has protected itself by balancing the value of the assets with the amount of the loan.
Structured finance includes a number of different forms of loans that have structures in place to try to transfer risk. One example is tranching, in which different securities are classed into different groups, allowing various investment groups to know the risk rating of the loans they are going to buy. Structured corporate lending uses different sorts of securities, including asset-based securities backed by government notes, credit derivatives, collateralized fund organizations, and collateralized debt obligations. Each of these have their own sub-classes as well, and it can get rather complex, but at its core is the idea of lowering risk for the lenders and the people who buy the loans.
Corporate lending can also take the form of straight cash flow investment to keep the business liquid. This can take place on the commercial paper market, where large institutions lend money in an unsecured fashion to established corporations for them to meet immediate cash needs, such as payroll or infrastructure investment. This is probably the most dangerous form of lending, as it is unsecured by any sort of real guarantee. As a result, paper market loans tend to be given only to very stable, well-known corporations, who have incredibly high credit ratings.
Even then, however, it is possible for this sort of lending to go wrong, and when it does, it tends to go horribly wrong. It happened once in 1970, when Penn Central defaulted on $82 million US Dollars (USD), and again in 1997 when Mercury Finance defaulted on $17 million USD and an eventual $315 million USD. In the first case, the US federal government intervened, and in the second case, the effects were diminished by the strong economy. In 2008, however, Lehman Brothers defaulted on their loans, and it helped lead to a massive economic downturn.
The world of corporate lending is arguably one of the most complex in the world of economics, and even relatively minor events can have massive effects. In spite of its dangers, however, it is absolutely necessary for modern capitalism to survive, and so there is a constant discussion about how to best manage the risk inherent in the system.
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