A bank loan is a monetary loan received from a commercial lender. The loan may have a specific purpose, such as a car loan or a home loan. It will have a predetermined duration, and the loan will have an interest rate that is either fixed or adjustable. Generating loans and charging interest on those loans is the very purpose of a modern bank.
Banks can provide a loan in different ways. A loan can be in cash or in non-cash form. If a client takes advantage from a bank by issuing the bank’s goodwill through making a contract, this will be treated as “goodwill loan” of the bank.
Functions of Bank Loans Provided to Business Organizations: Loans cannot be collected without a price. Nobody can afford to keep something idle and unproductive, which was purchased paying a competitive price. Loans are usually taken by individuals or corporate houses. Functions of such bank loans include among others the following:
- Working Capital Loan,
- Seasonal Deficit
- Economic Cycle Requirement Loan,
- Asset Replacement Loan,
- Fixed Asset, Acquisition Loan,
- Bridge Loan,
- Export-Import Loan.
Functions provided to Business Organizations:
Business persons and business institutions ignite the economic progress of a country. Banks participate in this process by providing loans to business houses/ organizations. Functions for such loans taken by the business organizations take such loans are discussed below:-
Working Capital Loan: If the business organizations need more capital in production due to lack of working capital, mostly to procure raw materials, fuels, accessories, etc. banks help them by lending the money in order to arrange those and thus assist the business organizations to increase production.
Seasonal Deficit Loan: Some business organizations need more capital in some seasons because of great seasonal demand. Commercial banks provide loans for the deficit capital in order to buy raw materials and other related inputs.
Economic Cycle Requirement Loan: In a recession, banks may need a loan to recover from the bad times. With this type of loan, production is increased. Employment and national income may also be increased. And at last, the economic condition of the country will be improved.
Asset Replacement Loan: Business institutions need loans for replacement of fixed assets. This type of loan helps business organizations to repair and reestablish the torn out and old assets and machineries.
Asset Acquisition Loan: In the light of competitors’ demonstration a business organization may plan to acquire newly developed machines or other assets for which bank may extend loans.
Bridge Loan: Public limited companies are required to fulfill some formalities in order to be established in the stock exchanges. When in short of funds they may require additional financing for the purpose. Banks, when finding reasonable, extend loans to such companies from raising money through new issues arrange to repay the loans taken. The purpose of this loan is to make the business organization capable of issuing shares.
Export and import Loan: Export-Import business helps the economy to grow fast. The exporters and importer are helped to augment the volume of their businesses with additional loans by the banks. Banks also help these business houses by issuing L/C and even standby L/C for a particular period of time.
Finally, we can say that commercial banks loans have a number of functions to perform for the welfare of their customers as well as the economy of the country.