Corporate lending is the business of banks, private debt funds, and other institutional lenders extending credit directly to companies rather than to individuals. The loan is underwritten against the borrower’s revenue, cash flow, and assets, priced off a floating benchmark rate plus a credit spread, and governed by a written agreement that spells out covenants, collateral, and the lender’s remedies if the company falls behind. Everything else in this market is a variation on those basics.
Who Borrows and Who Lends
Borrowers run from large public companies with investment-grade credit ratings — BBB- or higher from S&P, or the equivalent from Moody’s and Fitch — down to smaller or more leveraged private companies rated below that threshold.1S&P Global. Understanding Credit Ratings Investment-grade borrowers pay a relatively thin margin above the benchmark because default risk is low. Speculative-grade or high-yield borrowers pay meaningfully more.
On the lending side, commercial banks still anchor the market. They fund loans with customer deposits and generally hold shorter-duration, amortizing debt on their own books. Regional and community banks concentrate on middle-market companies; the largest global banks lead syndicated deals worth billions.
Private credit has grown aggressively into space banks used to own. Private debt funds, insurance companies, and pension funds now make direct loans to companies — especially below-investment-grade borrowers — using capital raised from institutional investors instead of regulated deposits. They can move faster than a bank syndicate and offer more flexible terms, usually at a higher price. Investment banks sit in the middle: they underwrite and distribute large syndicated loans without necessarily holding much of the paper themselves.
What Companies Borrow For
Working Capital
The most routine reason to borrow is to bridge the gap between paying bills and collecting from customers. Payroll, inventory, and supplier invoices come due on fixed schedules while revenue arrives on its own. Working capital loans fill that gap. They tend to be short-term, revolving facilities the company draws on during lean months and repays when receivables come in.
Capital Expenditures
Longer-term borrowing funds investment in productive capacity: new equipment, facility construction, technology upgrades, fleet expansion. Because these assets generate returns over years, loan structures match, with repayment aligned to the asset’s useful life. The purchased asset itself often serves as collateral.
Acquisitions and Leveraged Buyouts
Acquisition financing is where corporate lending gets most complex. When one company buys another, the price frequently runs into the billions and the buyer finances a substantial portion with debt. In a leveraged buyout, a private equity sponsor contributes a relatively thin layer of equity and funds the rest through multiple layers of debt, with the acquired company’s assets and projected cash flow serving as both collateral and the repayment source.
These deals turn on intense analysis of the target’s earnings before interest, taxes, depreciation, and amortization (EBITDA). Lenders stress-test projections aggressively, because a buyout that works at five times EBITDA in leverage can collapse quickly if revenue drops even modestly.
Dividend Recapitalizations
A less obvious use of debt is the dividend recapitalization, where a company borrows specifically to pay a dividend to its shareholders. Private equity firms use this to pull cash out of a portfolio company without selling it, improving the fund’s internal rate of return. The company’s balance sheet takes on more leverage without acquiring any new revenue-generating asset, which makes these transactions inherently riskier for the company.
The Main Loan Structures
Revolving Credit Facilities
A revolver works like a corporate credit line. The borrower can draw, repay, and redraw up to a set limit for the life of the facility, which makes it the primary tool for managing working capital swings. Interest accrues only on the drawn amount. The borrower also pays a commitment fee on the undrawn portion — typically a fraction of the credit spread — to compensate the lender for reserving the capital.2Federal Reserve Bank of New York. An Updated User’s Guide to SOFR Most revolvers run three to five years before renegotiation or replacement.
Term Loans
Term loans provide a lump sum upfront that the borrower repays on a fixed schedule. They come in two main flavors, and the difference matters.
Term Loan A (TLA) structures amortize fully over the life of the loan, so principal pays down steadily with each scheduled payment. TLAs are traditionally held by commercial banks and tend to have shorter maturities. Term Loan B (TLB) structures carry minimal amortization — often just 1% of principal per year — with the vast majority due as a single bullet payment at maturity. TLBs typically mature in five to seven years and are sold to institutional investors like collateralized loan obligation (CLO) funds, debt funds, and insurance companies, which accept the back-loaded structure in exchange for higher yields.
Syndicated Loans
When a financing need exceeds what any single bank will commit to, lenders form a syndicate: a group of banks and institutional investors that jointly fund the facility. One institution serves as the administrative agent, acting as the central point of contact between the borrower and the lending group and processing debt service payments. The lead investment bank, called the arranger or bookrunner, structures the deal, sets the pricing, and markets the loan to potential syndicate members. Syndication lets enormous transactions close by distributing credit risk across dozens of balance sheets, but the borrower deals with a more complex creditor group if anything goes wrong.
Bridge Loans
Bridge loans are short-term facilities designed to guarantee that an acquisition can close even if permanent financing isn’t ready. They typically mature in a year or less and carry interest rates that step up quarterly, pushing the borrower to refinance quickly. If the borrower can’t refinance by maturity, the bridge often converts automatically into a longer-term loan or bond at a higher cap rate. The intent is that the bridge never actually funds; it exists to remove funding risk from the deal and show the seller certainty of financing.
Secured vs. Unsecured
Secured debt requires the borrower to pledge specific assets — real estate, equipment, inventory, or accounts receivable — as collateral. If the borrower defaults, the lender can seize and sell those assets. To establish legal priority over other creditors, the lender must perfect its security interest, which under Article 9 of the Uniform Commercial Code generally requires filing a financing statement in the appropriate state office.3Legal Information Institute. UCC 9-310 – When Filing Required to Perfect Security Interest Secured lenders accept lower interest rates because they have a direct claim on specific assets.
Unsecured debt carries no collateral pledge. The lender has only a general claim on the company’s assets and cash flow, which puts it junior to secured lenders in bankruptcy. To compensate for the weaker position, unsecured loans carry higher rates and often tighter operational restrictions.
When a company has both first-lien and second-lien secured debt, an intercreditor agreement governs the relationship between the two creditor groups. First-lien lenders hold senior priority over the shared collateral and typically have the exclusive right to enforce remedies without the consent of the second-lien group. Second-lien lenders accept this subordination in exchange for a higher rate, but they may recover little or nothing if the collateral doesn’t cover the first-lien debt in full.
Prepayment and Call Protection
Most leveraged loans include provisions that penalize or restrict early repayment. The most common structure is a premium schedule: “102/101” means the borrower pays a 2% premium on principal repaid in the first year and 1% in the second, after which prepayment is unrestricted. Some deals use a make-whole provision instead, requiring the borrower to pay all interest that would have accrued through the end of the protection period. A soft call is narrower, applying the premium only when the borrower refinances specifically to lower its borrowing cost. These terms can significantly raise the effective cost of refinancing into a cheaper deal, so they warrant close attention in any new credit agreement.
How the Interest Rate Is Built
Most corporate loans carry a floating rate built from two components: a benchmark rate plus a credit spread. The benchmark for nearly all U.S. dollar corporate loans is now the Secured Overnight Financing Rate (SOFR), which replaced LIBOR after that rate was phased out. SOFR is calculated daily by the Federal Reserve Bank of New York as a volume-weighted median of overnight Treasury repurchase agreement transactions.4Federal Reserve Bank of New York. Secured Overnight Financing Rate Data
The credit spread, sometimes called the applicable margin, is the premium the borrower pays on top of SOFR to compensate the lender for credit risk. A well-rated investment-grade company might pay SOFR plus 125 to 200 basis points (1.25% to 2.00%); a leveraged borrower could pay SOFR plus 400 to 600 basis points or more. The all-in rate equals the benchmark plus the applicable margin.2Federal Reserve Bank of New York. An Updated User’s Guide to SOFR
For syndicated loans, the standard convention is to use SOFR “in arrears,” meaning interest is calculated using the actual daily SOFR rates published during the interest period rather than a rate locked in at the start. The two recommended structures are Daily Simple SOFR, where the overnight rate is multiplied by the outstanding principal each day, and Daily Compounded SOFR, where the rate compounds over the period.5Federal Reserve Bank of New York. SOFR In Arrears Conventions for Syndicated Business Loans Some loans, especially where the borrower prefers predictability, use a forward-looking Term SOFR rate instead, though this is less common in large syndicated facilities.
How Lenders Decide to Lend
Credit analysis is where most of the work happens. Lenders dissect the business model, competitive position, management quality, and the durability of cash flows under stress. Three pieces matter most.
Cash Flow and the DSCR
The central question in any underwriting is whether the company generates enough cash to service its debt with a comfortable margin of safety. Lenders quantify this with the Debt Service Coverage Ratio (DSCR), which compares available cash flow — typically net operating income or EBITDA after adjustments — to required principal and interest payments. A DSCR of 1.0x means the company earns just enough to cover its debt payments with nothing to spare. Most lenders require at least 1.25x to 1.50x, and stronger credits show 2.0x or higher. The ratio is often tested quarterly and embedded in the loan agreement as a financial covenant.
Collateral
Beyond cash flow, lenders protect themselves by taking security interests in the borrower’s assets. The collateral package is valued carefully and the loan amount capped at a percentage of that value, leaving a cushion so the lender can still recover if asset prices decline. For asset-heavy borrowers like manufacturers or real estate companies, collateral coverage is straightforward. For service businesses or technology companies with few tangible assets, lenders may take liens on intellectual property, receivables, or the stock of the borrower’s subsidiaries.
Covenants
Covenants are the rules the borrower lives under for the life of the loan. They fall into three categories:
- Affirmative covenants require the borrower to do certain things: maintain insurance, deliver audited financial statements on schedule, and stay in compliance with applicable laws.
- Negative covenants restrict what the borrower can do without lender approval, such as taking on additional debt, selling major assets, paying dividends above a threshold, or entering into mergers.
- Financial covenants are quantitative performance tests, such as keeping total debt below a specified multiple of EBITDA or maintaining a minimum interest coverage ratio.
Breaching any covenant, even while making every scheduled payment on time, is a technical default and gives the lender the right to accelerate the debt or force a renegotiation of terms.
One important shift over the past decade is the dominance of “covenant-lite” loans, which eliminate the ongoing financial maintenance tests. A cov-lite loan tests the ratio only when the borrower voluntarily takes a triggering action, like raising additional debt. This incurrence-based structure mimics high-yield bonds. Borrowers get significantly more operating flexibility; lenders lose their early warning system when a company’s financial condition starts deteriorating.
What Happens When a Borrower Defaults
Not all defaults are equal, and the lender’s playbook diverges sharply depending on which kind it faces.
A payment default is the straightforward kind: the borrower misses a scheduled principal or interest payment. A technical default happens when the borrower violates a non-payment covenant — breaching the leverage ratio, failing to deliver financial statements on time, or selling assets without permission. A company can be current on every payment and still be in technical default. Most loan agreements include a grace period for technical defaults, giving the borrower a window to cure the violation before the lender can exercise remedies. For payment defaults, the grace period is usually much shorter or nonexistent.
Once a default occurs and any applicable grace period expires, the lender’s primary remedy is acceleration: declaring the entire outstanding loan balance immediately due and payable. Very few borrowers can repay the full balance on demand, which is what makes this such a powerful remedy. Acceleration typically triggers cross-default provisions in the borrower’s other debt agreements, so a single default can cascade across the entire capital structure. Secured lenders can also foreclose on collateral, and any lender can pursue the full range of legal remedies available under the loan documents and applicable law.
In practice, lenders often prefer negotiation. A forbearance agreement is the most common tool: the lender temporarily suspends its right to accelerate the debt or pursue other remedies, giving the borrower time to stabilize. In exchange, the borrower typically acknowledges the default, waives its own legal defenses, and agrees to a set of corrective actions, which might include hiring a financial consultant, listing assets for sale, seeking refinancing, or providing additional collateral. The borrower usually also represents that it does not intend to file for bankruptcy during the forbearance period.
If forbearance doesn’t resolve the situation, the parties may move to a formal restructuring: amending the loan terms to extend maturities, reduce the interest rate, convert debt to equity, or write off a portion of principal. For syndicated loans with dozens of lenders, these negotiations can be protracted and contentious, because each lender’s incentives depend on where it sits in the priority stack.
Tax and Disclosure Rules That Shape the Deal
Interest Deductibility
One advantage of debt over equity financing is that interest payments are tax-deductible, which lowers the true cost of borrowing. The deduction is not unlimited. Under Section 163(j) of the Internal Revenue Code, a business can deduct interest expense in any tax year only up to the sum of its business interest income plus 30% of its adjusted taxable income (ATI), plus any floor plan financing interest.6Office of the Law Revision Counsel. 26 USC 163 – Interest Interest above the cap carries forward to future years, but for highly leveraged companies the 30% ATI ceiling can meaningfully reduce the expected tax benefit of loading up on debt.
SEC Reporting for Public Companies
When a publicly traded company enters into a material credit agreement, or amends one materially, the SEC requires disclosure on Form 8-K within four business days. The filing must describe the date, the parties, and the material terms, giving investors near-real-time visibility into significant changes in the company’s debt structure.7U.S. Securities and Exchange Commission. Form 8-K Missing the deadline or omitting material terms can trigger enforcement action, so most public companies build the 8-K deadline directly into their deal timelines.
Sustainability-Linked Loans
A growing segment of the market ties interest rate pricing to the borrower’s environmental or social performance. Under a sustainability-linked loan, the borrower and lender agree on specific sustainability performance targets measured by key performance indicators, such as greenhouse gas emission reductions or workplace safety metrics. If the borrower meets the targets, the interest margin steps down; if it misses, the margin steps up.8ICMA Group. Sustainability Linked Loan Principles The pricing adjustment is usually modest, a few basis points in either direction, but it creates a financial incentive for measurable improvement.