Loan Financing

Loan financing is the important mode of finance raised by the company. Loan finance may be divided into two types:  Long-Term Sources and Short-Term Sources

Loan finance can be raised through the following important institutions.

Financial Institutions

With the effect of the industrial revaluation, the government established nation wide and state wise financial industries to provide long-term financial assistance to industrial concerns in the country. Financial institutions play a key role in the field of industrial development and they are meeting the financial requirements of the business concern. IFCI, ICICI, IDBI, SFC, EXIM Bank, ECGC are the famous financial institutions in the country.

Commercial Banks

Commercial Banks normally provide short-term finance which is repayable within a year. The major finance of commercial banks is as follows:

Short-term advance

Commercial banks provide advance to their customers with or without securities. It is one of the most common and widely used short-term sources of finance, which are needed to meet the working capital requirement of the company.

It is a cheap source of finance, which is in the form of pledge, mortgage, hypothecation and bills discounted and rediscounted.

Short-term Loans

Commercial banks also provide loans to the business concern to meet the short-term financial requirements. When a bank makes an advance in lump sum against some security it is termed as loan. Loan may be in the following form:

Cash credit

A cash credit is an arrangement by which a bank allows his customer to borrow money up to certain limit against the security of the commodity.

Overdraft

Overdraft is an arrangement with a bank by which a current account holder is allowed to withdraw more than the balance to his credit up to a certain limit without any securities.

Development Banks

Development banks were established mainly for the purpose of promotion and development the industrial sector in the country. Presently, large number of development banks are functioning with multidimensional activities. Development banks are also called as financial institutions or statutory financial institutions or statutory non-banking institutions. Development banks provide two important types of finance:

1. Direct Finance
2. Indirect Finance/Refinance

Presently the commercial banks are providing all kinds of financial services including development-banking services. And also nowadays development banks and specialisted financial institutions are providing all kinds of financial services including commercial banking services. Diversified and global financial services are unavoidable to the present day economics. Hence, we can classify the financial institutions only by the structure and set up and not by the services provided by them.