Broadly there are two different types of financing: loans and credits. Both are banking instruments that lends money to borrowers, but they have different definitions and goals.
Term Loan:
A term loan is simply a loan that is granted for a set period of time and must be repaid in monthly instalments. These loans are for a longer period of time, ranging from one year to ten or thirty years. The interest rate charged under these loans may be fixed or variable, depending on market fluctuations. Term loans are typically used for small business loans, but they can also be taken out on an individual basis.
What amount of Term Loan can you get? And what is the relevant security to be provided?
The amount of Term Loan is based a lot on the credibility of the borrower. Borrower must have:
A respectable CIBIL score (above 700)
Net worth or pledgeable security of around 40% of the loan.
Pledgeable security includes:
Land
Building
Flat
Insurance policies
Investment in fixed income security (FDs, Debentures etc)
Shares and Mutual Funds
Must have good experience in the industry (7+ years).
The asset purchased with the term loan amount will serve as the primary security
Advantages of Term Loan
The loan is affordable.
The interest paid on the term loan is tax deductible, so the borrower can benefit from the interest paid
Cash Credit Loan:
Businesses require consistent cash inflows to run their day-to-day operations. A company's smooth business operations may suffer if its working capital requirements are not properly met. Cash credit loans, also known as working capital loans, are designed to meet these business needs. These funds may be used for any type of operational expense, such as raw material procurement, machinery purchase, overhead costs, debt settlement, inventory costs, and so on.
Companies that take out cash credit loans must provide the lender with collateral. Even assets such as inventory, work-in-process goods, and so on can be hypothecated in exchange for a cash credit loan. Businesses typically maintain a running account with a specific lender for cash credit loans and draw funds from the account as needed.
What amount of Cash Credit can you get?
The banks offer up-to 25% of sale as cash credit, of course they require additional Pledgeable security apart from the stocks being primary security.
Advantages of Cash Credit
Helps to meet the requirement of day-to-day liability of business.
Customers can monitor their loans and repayments through the company's online account.
We hope the above blog was helpful in enhancing your knowledge on the matter. In case of any queries feel free to get in touch with our team of experts.
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