What is Loan Capital?

Loan Capital is the part of a company’s capital that is not equity capital but earns a fixed rate of interest instead of dividends, and must be repaid within a specified period; irrespective of the company’s financial position. Loan capital may be obtained from a bank or finance company in the forms of long-term loans, or from debt-equity investors in the form of debentures or preferred stock (preference shares). It is usually secured by a fixed and/or floating charge on the company’s assets. Unlike debt capital, it does not include short-term loans (such as overdraft).

Loan Capital can also be defined as a long-term capital that is employed from sources other than common stock or savings. That is, loancapital is whatcompany 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.

In the same vein, A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond to secure capital. Like other types of bonds, debentures are documented in an indenture.

Types of Debentures

  • Redeemable and Irredeemable (Perpetual) Debentures
  • Convertible and Non-Convertible Debentures
  • Fully and Partly Convertible Debentures
  • Secured (Mortgage) and Unsecured (Naked) Debentures
  • First Mortgaged and Second Mortgaged Debentures
  • Registered Unregistered Debentures (Bearer) Debenture
  • Fixed and Floating Rate Debentures
  • Zero Coupon and Specific Rate Debentures
  • Callable and Puttable Debentures/Bond

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