loan capital

Loan Capital

Long-term capital employed from sources other than common stock or savings. That is, loan capital is what a company has borrowed or issued in preferred stock. Loan capital is distinguished by the fact that a company is required to pay coupons or dividends periodically. That is, unlike common stock, loan capital carries a fixed liability for a company. Likewise, it is usually collateralized by one or more of the company's assets.

loan capital

or

debt capital

the money employed in a company that has been borrowed from external sources for fixed periods of time by the issue of fixed-interest financial securities such as DEBENTURES. The providers of loan capital do not normally share in the profits of the company but are rewarded by means of regular INTEREST payments which must be paid under the terms of the loan contract. Interest payments are a business expense which must be charged against revenues in calculating profits. See SHARE CAPITAL, BALANCE SHEET, CAPITAL GEARING.

loan capital

or

debt capital

the money employed in a company that has been borrowed from external sources for fixed periods of time by the issue of fixed-interest financial securities. The providers of loan capital do not normally share in the profits of the company, as do providers of SHARE CAPITAL, but are rewarded by means of regular INTEREST payments that must be paid under the terms of the loan contract. Lenders take precedence over shareholders both for receipt of interest payments out of profits and the repayment of the capital sums subscribed in the event of company INSOLVENCY. Loans carry various degrees of risk if the borrower defaults on the loan. Least risky are DEBENTURES, secured by means of a ‘fixed’ charge on a specific company asset such as a particular machine which the lender could claim in the event of default. Next come debentures secured by means of a ‘floating’ charge against all company assets in the event of default. Finally, holders of‘subordinated’ loans (often referred to colloquially as ‘junk bonds’) would receive repayment of their loans only after the claims of other lenders have been met. These increasing degrees of risk are reflected in the interest rates paid to lenders, holders of unsubordinated loans generally being offered higher interest rates than debenture holders. See CAPITAL GEARING.