What is Bank loan? and its types.

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Bank Loan

Loan is a type of debt and link with other debt instrument. Amount of money that has been borrowed; something borrowed; act of giving temporarily or lend a sum of money for a period of time; give temporarily, lend

Types of loan

1. Secured loan


Banks and other finance companies often require security for a short term loan just as they do for a long-term loan. Security for short-term loans usually consists of accounts receivable, inventories, or both.

i. Account receivable financing

A secured short term loan that involves either the assignment or the factoring of receivables. Under assignment, the lender has the receivables or factoring receivables. Under assignment, the lender has the receivables as security, but the borrower is still responsible if a receivable can’t be collected.

ii. Inventory loan

A secured short term loan to purchase inventory

2. Unsecured loan

The most common way to finance a temporary cash deficit is to arrange a short-term unsecured band load. Firms that use short-term band loans often arrange for a line of credit.

i. Line of Credit

A formal (committed) or informal (none committed) prearranged, short term bank loan. A line of credit is and agreement under which a firm is authorized to borrow up to a specified amount. To ensure that the line is used for short-term purposes, the lender will sometimes require the borrower to pay the line down to zero and keep it there for some period during the year, typically 60 days (called up cleanup period).

ii. Compensating Balance

As a part of a credit line or other lending arrangement, banks will sometimes require that the firms keep some amount of money on deposit. This is called a compensating balance. Money kept by the firm with a bank in low interest or non interest bearing accounts as part of a loan agreement.

iii. Letter of Credit

A letter of credit is a common arrangement in international finance. With a letter of credit, the bank issuing the letter promises to make a loan if certain conditions are met.

Other sources

i. Commercial Paper

Commercial paper consists of short term notes issued by large, higly rated firms. Typically, these notes are of short maturity, ranging up to 270 days (beyond that limit, the firm must file a registration statement with the SEC). Because the firm issues these directly and because it usually backs the issue with a special bank line of credit, the interest rate the firm obtains is often significantly below the rate a band would charge for a direct loan.

ii. Trade Credit

A firm buys goods and services from suppliers without immediately payment.

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