Money is a vital component of any commercial business and always acts as a vehicle for fulfilling the short or long term requirements for running firm or fulfilling obligations off entrepreneurs .It is an arduous task to fund an investment entirely by the ownership due to lack of sufficient capital. Also, it is always indispensable for a company to have working capital for investment purposes. The factor which is integral in this concept of financial aid is, time. The entire process of financing ,that is sanctioning of loans and advances by financial institutions or lenders, inevitably operates for monetary gain and this growth of money takes place over time.
The loan is an amount that can be offered by financial institutions or financing lenders for a specific period. On the other hand go ahead once is monetary aids which we can also called as cash flows provided to business organizations to act as working capitals forest a bulleted period of 1 year.
Both of these entities are associated with the payment of interest which can be split into monthly installments or can be paid off as a lump sum.
|Degree of comparison
|1.Also called as
|| Credit instrument
||Long term nature
||For short term
|| Incidence inclined
|| Less or decreased incidence
|4.Need for Collateral security
||Can be both secured and unsecured.
||Primary security bank guarantee and collateral security mandatory.
There force there are few subtle technical and administrative differences in various components of loans and advances.
What is a loan?
It is an amount or debt handed over to firm or organization or even an individual borrower with an agreement of repayment of the same amount along with some interest levied for that time period.
The purpose for lending such an amount after signing off and contract by both the parties Can vary depending upon the individual borough or to some businesses as business loans.
- Construction of buildings
- Daily capital requirements or substantial capital requirements
- Purchasing of infrastructures
- Maintenance work or new machinery.
The most crucial part for lending alone is an evaluation of credibility of the borrower. The word credibility means the financial structure of the borrower which includes his capacity to pay back the loan. The credibility is also a decisive factor for the interest rate to be applied on the loan amount. Such loans are associated with collateral’s which act as security for the lender if the borrower defaults in repayment. The method of repayment is a long term process divided into monthly installments or in the form of lump sum, as dictated in the contract agreement.
- Based on security:
a.Secured loan- such a loan is backed by a collateral like building, stocks etc,the legal possessions of which, by the lenders, covers their risk.
b.Unsecured loan- associated with a greater interest rate, this loan holistically depends upon the trustworthiness of the borrower and the faith of the lender without any collateral or an asset being pledged.
- Based on Repayment schedules:
a.Demand loan- from the name itself such loan is disbursed by the lenders on the condition of being repaid by the borrower on demand. It is generally of lower quantum and not necessarily having equated monthly installments.
b.Time loan- such loans need to be repaid entirely at a particular future date, specified in the agreement and decided upon both by the borrower and the lender mutually, inclusive of the complete principle and the accrued interest.
- Installment loan- also called EMI loans that is equated monthly installment loans, which are the most ubiquitous. These are mutually approved by an ironclad contract describing the size of the monthly payment including both a part of principal and interest.
- Purpose or Utility based :
The common objective of any kind of loan or money borrowed is the economic activity for which they are enrolled upon like-
- Home loan
- Educational loan
- Commercial loan
- Industrial loan
- Car loan
- Personal loan.
What are advances?
These are typically credit facilities or financing resources provided by banks to the companies or big businesses for a short term, mostly of less than one year. The norms and regulations of such advances are instituted by the central bank and the lender bank.
The advances are facilitated to companies on variables like –
Primary security- that is the bank is a priority to be repaid the loan rather than any other private debt holders for that company.
Collateral loan- mortgages of properties or assets.
Guarantees- by promoters or partners .
Credit instruments related to the advances are:
- Short term loan – rendered to the borrower at one time and the entire amount
- Overdraft- in this provision the customer can overdraw money from his account until a specified cap
- Bill purchase- grant provided on presentation of bills which are pledged.
- Cash credit- a customer can advance money up to an asset pledged
THE MAJOR DIFFERENCES IN LOANS AND ADVANCES-
- Application protocols and formalities:
A cardinal comparative point between loans and advances targets towards the extensive and highly formal documentation stage ,which is in the pre-approval phase of sanctioning of advance, as compared to disbursement of a loan.
There are a wide range of screening processes which determine the financial eligibility of the borrower businesses to repay the loan on time and centralize on the coverage of risks by demanding for collateral security and guarantee.
However the loans are emancipated from such administrative technicalities and are highly customer centric , typically dependent upon the borrowers income proof and ID documents.
- Time period or tenure for repayment :
This is another radiant which discriminates the loan and advances.
Depending upon the type of loan like educational loan, home loan or personal loan the repayment schedule can be decided. Most commonly it varies between 5 and 30 years .Further, the repayment can be serviced by EMI or lump sum according to the terms of the agreement added at the embankment of loaning process.
However the hallmark of advances is a smaller repayment. This is due to the fact that they are generally given to businesses with high market capitalization. The repayment is instituted upon the profits on annual basis. The repayment period is often between 3 months and one year, which is the maximal period, that can be implemented.
- Interest rates applicable:
The interest component is a vital profit factor, taken into consideration during loan disbursal. The demands of the interest payment along with the principal repayment are legal obligations of the borrowers.
For commercial lenders and government- run banks, the interest is proportionately distributed across the repayment. Basically it is calculated depending upon the principal amount. In advance payments, a significant part of the interest component is used for covering the risk management cost.
Interest rates in case of loans are lower as compared to the advances.
- Security deposit:
According to the quantum categories, in case of loans, the majority of them do not require securities .However in advances, as they are risk prone, a collateral security is an imperative feature, which is never overlooked.