[August 2023]
1 minute speech
Title : Loan Structure | Overview, Components, and Examples
Link : https://youtu.be/M3XI10BDDKM?si=PCG-RXDP53jKL2Ll
1. Summary
Loan structure, often termed credit structure, involves tailoring loan features for unique offerings to clients and prospects. This encompasses aspects like interest type, amortization period, interest rates, covenants, and asset type. Borrower risk profile, asset nature, and transaction specifics influence these features. World-class credit professionals recognize that flexible and innovative structures are key to securing new business opportunities in addition to adhering to established credit policies.
2. Script
Loan structure is often referred to by bankers and lenders as credit structure. Credit structure is the concept of customizing different features to create really unique loan offerings for clients and prospects.
Examples of loan features include whether a credit will be extended as interest only or if it will reduce with monthly or periodic principal repayments. This is known as amortizing. If it is amortizing, over how many years will the loan be repaid? What will the interest rate be? Will there be loan covenants? If so, which ones and why?
There are several important criteria to think about when considering loan structure. These can be broadly categorized as the borrower's risk profile, the type of asset being financed, and client or transaction-specific considerations.
Within these criteria categories are a number of different loan features or characteristics. For example, interest rates are a function of the client's risk profile, especially for commercial borrowers. Interest rates can be fixed or they can be variable, sometimes called floating. These are important elements of credit structure.
If the loan is secured, the nature of the asset will tend to influence the loan-to-value (LTV) as well as the length of the amortization period. Although the risk profile and the transaction itself may also impact the amortization period of a loan.
In terms of transaction specifics, this often influences what types of covenants should be included, as well as the nature of financial reporting and whether indirect security will be taken, like a personal guarantee, for example. If the transaction is leveraged by a private equity firm, a leveraged covenant will almost certainly be included to help get the capital structure into a normal range more quickly. If the deal is a small business loan for, say, a delivery van, on the other hand, covenants may be excluded, but a personal guarantee by the owner is very likely.
While most financial institutions have credit policies in place around these loan characteristics, world-class credit professionals understand that designing creative and accommodating structures can be the best way to win new business.