A loan is a sum of money borrowed from an individual, institution or any financial agency for a stipulated amount of time, at the end of which it has to be repaid. A loan normally has certain conditions attached to it in the form of a contract. It usually carries a rate of interest which is added to the principal amount at the time of repayment. The loan is usually paid back in installments or partial repayments. Each installment will carry the same amount. Additional charges in the form of fines may be levied on defaults in repayment.
Loans maybe secured as well as unsecured. Secured loans require some form of collateral, i.e. the borrower will have to pledge some asset. (Property, jewelry etc) Unsecured loans do not require any pledging of assets. The interest rates are variable on these loans. (Credit card debts, bank overdrafts etc are examples)
A business enterprise applies for loans for various reasons. Sometimes an entrepreneur may be in short of working capital so he applies for a short term loan to meet his needs. He may also be planning diversification of the business whereby he needs to acquire more land and buildings, equipments etc. Going for a long term loan will be the only option left to him. The eligibility of a business for a loan depends upon its creditworthiness or reputation in the industry.
The approval criteria for a loan differ with each lending organization although there are common factors governing almost applications. The financial background of the owner/owners of the business is one such element common to almost all applications. Where do loans usually materialize from?
Banks
Credit Unions
Small Business Administration
Thrift Institutions
All financial institutions engage in loan activities or issue bonds which are again debt contracts.
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