Commercial banks are able to offer relatively flexible financing. It is difficult to change restrictions arising from bond issues at a later date because of the number of bond- holders. A bank will also seek such covenants but is likely to be relatively flexible in terms of renegotiating the conditions at a future date. The borrower may also be able to extend the term of the loan, increase its balance or repay the loan earlier than originally agreed depending on changed business conditions.
An example of the sort of flexibility banks can offer is provided by the use of caps and collars. Take the following case as an example. A borrower with a floating rate loan is prepared to accept a level of interest rate risk but wishes to cap that risk at a certain level. If the borrower is prepared to forego some of the potential upside from lower interest rates a cheaper alternative is a collar and in this example the actual rate paid will vary only between 9% and 11%. Caps and collars provide further examples of the use of options.