What is loan capital & how does it work?

Unlike common stock, loan capital requires some type of periodic interest payment back to investors for use of the funds. However, these investors do not share in the profits earned by the organization, though they have payment preference over shareholders in the event of a business default.

What is the most common source of loan capital?

It is the most common source of loan capital. Bank loans can be further categorized into: Secured bank loans: The borrower has to provide an asset to the lender as collateral in this type of bank loan. If the borrower fails to repay the loan, the lender has the right to sell the asset and recover the loan.

What is the difference between equity capital and loan capital?

In the case of a company, loan capital is the opposite of equity capital, which is the contribution of the owners and shareholders of the company. It is usually raised through bank loans, overdrafts, credit cards, bonds, etc. The cost of loan capital is referred to as the interest rate.

Do Loan capital providers share in the profits of a company?

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.