In business, a loan is any financial lending of monies to another party, corporations, or individuals for a specific purpose. The borrower is obligated to repay the interest on that loan as well as to fully repay the original principal amount borrowed and eventually to settle the debt. Banks are considered a source for loans in most countries. Lenders can be corporations, individuals or organizations.
Loans in finance are of several types. One such type is a merchant cash advance loan which is provided to establishments such as stores and shops. A commercial loan refers to the financing of real estate by a lender. Another type of loan in finance is a commercial bridge loan, which is obtained by linking a working capital debt with a business line of credit.
To apply for a loan in finance, the usual procedure is for the borrower to apply to a lender either by going through a bank or a credit union. In case of a bank, the borrower provides a formal application with his personal and credit report in support of the loan request. The lender then analyzes the information provided by the borrower and conducts a credit check to assess the credibility of the borrower. After assessing the credit report, the lender offers the borrower a loan. The borrower uses the funds for his immediate needs only. However, the lender keeps a record of all the loans disbursed to the borrower and this record acts as a proof in case of an audit at a later date.
Bank loans money directly to the borrower and requires him to pay it back to the bank within a short period of time, called the “quick payoff”. However, if the borrower fails to make the repayment on time, the bank has the right to execute a federal garnishment against the assets of the borrower which include his home. A garnishment is valid under the law only if the debtor failed to pay the loan on time. A collection agency can also obtain a federal debt tax lien against the assets of the borrower, which includes his home, but this action is not considered a valid reason for the execution of a federal debt tax lien.
An advance is a loan that is advanced against the borrower’s future expected gross income. These loans are usually small loans that do not require collateral. For these loans, the lender requires a high degree of credit worthiness of the borrower. This requirement is because the amount advanced is based on the borrower’s anticipated gross income in the future. Credit worthiness refers to the ability of the borrower to repay a loan in time. If a borrower fails to comply with the terms and conditions of the loan agreement, he is termed a risky borrower by the lenders and this could adversely affect the status of the borrower’s credit rating.
A guaranteed loan is a type of loan that the lenders provide to the borrowers who pledge their property as security against the loan. The lender requires a certain degree of credit worthiness of the borrower and a certain rate of interest for the same. The major use of a secured loan is to provide an opportunity for a borrower to get a bigger loan, but he must repay it in a timely manner.