Commercial Loans include various types facilities provided to a business house to cater to their financial requirements.
The facilities can be segregated into following types:
Commercial Loans include various types facilities provided to a business house to cater to their financial requirements.
The facilities can be segregated into following types:
A term loan is a loan provided for business purposes that needs to be paid back within a specified time frame. It typically carries a fixed interest rate, monthly or quarterly repayment schedule – and includes a set maturity date. Term loans can be both secure (i.e. some collateral is provided) and unsecured. The purpose of term loan can be specific one such as a machinery or construction loan to a general purpose. A secured term loan will usually have a lower interest rate than an unsecured one. Depending upon the repayment period this loan type is classified as under:
Equipment Finance is commonly used by companies to fund procurement of equipment required for business. This helps in easing of the cash flows and maximizing the return of investment. This is provided to acquire new machinery only.
A Bank Overdraft and Cash Credit Facility refers to the ability to draw funds greater than are available in the company’s current account. The actual size of the facility and the interest to be paid is typically agreed to prior to sanction.
Letter of Credit
A letter of credit is a document issued by a financial institution assuring payment to a seller provided certain documents have been presented to the bank. This ensures the payment will be made as long as the services are performed (usually the dispatch of goods). Hence, a Letter of Credit serves as a guarantee to the seller that he or she will be paid as agreed. It is often used in trade financing when goods are sold to overseas customers or the trading parties are not well known to each other.
Bank Guarantee
A bank guarantee is a ‘letter of guarantee’ issued by a bank on behalf of its customer, to a third party (the beneficiary) guaranteeing that certain sum of money shall be paid by the bank to the third party within its validity period on presentation of the letter of guarantee. A letter of guarantee usually sets out certain conditions under which the guarantee can be invoked. Unlike a line of credit, the sum is only paid if the opposing party does not fulfil the stipulated obligations under the contract. A bank guarantee is usually used to insure a buyer or seller from loss or damage due to non-performance by the other party in a contract.
