A commercial loan is a debt-based funding arrangement between a business and a financial institution such as a bank. It is typically used to fund major capital expenditures and/or cover operational costs that may otherwise be unaffordable.
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A commercial loan is a debt-based funding arrangement between a business and a financial institution such as a bank. It is typically used to fund major capital expenditures or cover operational costs that may otherwise be unaffordable.
Commercial loans are lent by private banks and other financial institutions. There are a wide range of options included under private commercial loans. Typical examples of investors in local energy projects are insurance companies, pension funds, specialist debt funds and banks.
- Finance source: Commercial banks, insurance companies, debt funds and other financial institutions all provide debt on a commercial basis, with a wide variety of structures and terms.
- Funded project phase: Potentially all, but especially likely where it is clear sufficient cashflow exists to repay the borrowing, hence in the operation or construction into operation phases.
- Typical project size: Either one commercial lender loans direct to the borrower or a group of lenders can lend under structures such as ‘club’ or ‘syndicated’ transactions. Single loans from one lender could be expected to have a maximum size of £50–100 million, depending on the lender, project size and sector. Club and syndicated facilities can be arranged into the billions for the largest, highest quality projects.
- Match funding: May be available in certain circumstances.
- Security: Loans can be either secured on assets or unsecured, and/or can benefit from guarantees or other credit enhancements.
- Speed of accessing finance: In principle there should be a fast turnaround for straightforward loan structures (for example a direct loan to the local authority). More complex structures will require more lender due diligence and approval will take longer.
Local authorities can borrow money for any purpose relevant to their function from any source as long as the finance can be demonstrated to facilitate, or is conducive or incidental to, the discharge of any of the local authority’s functions. Loans provide organisations with cash or capital to continue their daily operations or any other capital needs that they may have. The loans can be unsecured or secured against the company's inventory, property, equipment or real estate.
Private providers of loans have a wide range of products available and some of these may be suitable for some local authority circumstances. Different lenders have widely differing areas of focus – some will provide only short-term lending, others longer term, some will be limited to small amounts while others would consider only facilities above a certain size, and so on.
Clear identification of the needs of the local authority (amount, length of loan, repayment profile) will help identify the most appropriate lender(s). Furthermore, since lenders compete for business, the borrower may be able to choose the most attractive/suitable loan from a range of offers.
In general terms, higher risk and/or longer maturities (because repayment is less certain) will require higher interest rates (margins) to compensate the lender for the increased risk.
There are lenders who can provide debt based on ethical-social principles, though in almost all cases, they will still make an essentially commercial judgement as to whether their loan repayment is appropriately low risk.
There is some mismatch between the way local authorities traditionally deliver projects and the expectations of private lenders. Investors have shorter timescales to make decisions and cannot always align with the decision-making process within local authorities.
✅ Investors need to see what the timeline for a project or programme is, along with a clear view of what stage the project is at from a budget, buy-in and decision standpoint. For example, does the project have sign off from the financial director? These aspects feed into the lender’s assessment of the risk level of the loan.
✅ The benefits and aims of a project need to be clearly communicated, along with realistic explanations of the risks and measures being taken to mitigate these.
✅ A consistent financial model with its assumptions clearly laid out should be available and should demonstrate that adverse situations (such as delays or budget overruns) can still be accommodated within an overall contingency).
✅ Lenders would like to interact with an intelligent customer, so make sure the project team understand the project scope, its potential financing and business model.
✅ Be clear who the primary contact is, and ensure that person is clear on the authority they have to discuss/negotiate on behalf of the local authority.
✅ Share with lenders a clear description of the potential risks and rewards of the project, including political risks from stakeholders both internal and external
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