A core part of corporate banking is providing financing to the corporate clients.
However, there are a number of different ways that this funding could be provided.
Let's have a look at some of the most common forms of lending a corporate banker could use to satisfy their client's financing needs.
Unsecured lending will be something as simple as an overdraft.
The issue with most overdrafts, however, is that they are repayable on demand.
In other words, they're uncommitted, so they are not a reliable source of funding for a corporate.
If a corporate wishes to ensure it has a more stable source of funding, they could make use of a revolving credit facility, also known as an RCF or revolver, where the bank commits to lend up to a certain limit as and when the client requires.
However, this commitment the bank makes does not come for free.
The corporate client will typically have to pay a commitment fee on any money that they don't borrow within the facility, in addition to interest on the amount they do borrow.
Let's move on to more secured loans where the money is borrowed and repaid either the same way as a revolver or via a pre-agreed repayment program.
The safety net for the banker is that with a secured loan, the bank has placed a charge on an asset the company owns.
This may be property, machinery, a vehicle fleet, et cetera.
Therefore, if the company defaults on the repayment, the bank will take ownership of the asset, allowing the bank to sell the asset to recoup any funds outstanding on the loan.
The benefit for the client of a secured loan is it normally has a lower interest rate than an unsecured loan.
Finally, if a corporate is operating in several different currencies, they may need different facilities by each currency.
If the lending required is large, say a hundred million dollars plus, this may be arranged through a group of banks known as a club deal.
Within a club deal, you can have primary lenders, those that arrange the deal and lend the most and secondary lenders, those that lend smaller amounts.
While lending is a core activity of corporate banks, it often does not generate the majority of their profits.
This is because the bank is lending money from its own balance sheet, which involves significant risk and therefore significant regulatory costs.
So although banks need to lend to companies to provide them with financing and build a banking relationship, lending activities are often not the main source of profit for a corporate bank.
Instead, profits come primarily from all the other services offered by a corporate bank.
Once the core banking relationship has been established.
