B Com Exam > B Com Notes > Accountancy and Financial Management > Loan Financing - Sources of Finance, Accountancy and Financial Management
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Loan Financing
Loan financing is the important mode of finance raised by the company. Loan finance may be divided into two types:
(a) Long-Term Sources
(b) 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:
(a) 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.
(b) 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:
(a) Direct Finance
(b) 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.
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FAQs on Loan Financing - Sources of Finance, Accountancy and Financial Management - Accountancy and Financial Management - B Com
| 1. What are the different sources of finance for loan financing? |  |
Ans. The different sources of finance for loan financing include:
1. Bank Loans: Banks provide loans to individuals and businesses based on their creditworthiness and ability to repay the loan.
2. Financial Institutions: Non-banking financial institutions also offer loan financing options to individuals and businesses.
3. Peer-to-Peer Lending: This is a relatively new source of finance where individuals can borrow money directly from other individuals through online platforms.
4. Trade Credit: Suppliers may offer credit terms to businesses, allowing them to purchase goods or services on credit and pay later.
5. Government Programs: Governments often provide loan programs to support specific sectors or industries, such as small businesses or agriculture.
| 2. What is the role of accountancy in loan financing? | |
Ans. Accountancy plays a crucial role in loan financing by:
1. Financial Analysis: Accountants analyze the financial health of individuals or businesses seeking loans, assessing their creditworthiness and ability to repay the loan.
2. Loan Documentation: Accountants prepare and maintain the necessary financial documents, such as balance sheets, income statements, and cash flow statements, which are required for loan applications.
3. Loan Repayment Tracking: Accountants track loan repayments, ensuring that borrowers make timely payments and adhere to the agreed-upon terms.
4. Financial Reporting: Accountants provide regular financial reports to lenders, giving them insights into the borrower's financial performance and ability to meet loan obligations.
5. Risk Management: Accountants assess the financial risks associated with loan financing, helping lenders determine appropriate interest rates, loan terms, and collateral requirements.
| 3. What is the role of financial management in loan financing? | |
Ans. Financial management plays a crucial role in loan financing by:
1. Loan Acquisition: Financial managers determine the optimal financing options for individuals or businesses, considering factors such as interest rates, repayment terms, and collateral requirements.
2. Financial Planning: Financial managers develop comprehensive financial plans that include loan repayment schedules, budgeting, and forecasting to ensure that borrowers can meet their loan obligations.
3. Cash Flow Management: Financial managers monitor cash flows to ensure that borrowers have sufficient funds to meet their loan repayments and other financial obligations.
4. Risk Assessment: Financial managers assess the risks associated with loan financing, such as interest rate fluctuations or changes in the borrower's financial circumstances, and implement risk mitigation strategies.
5. Financial Decision-making: Financial managers make informed decisions regarding loan financing, considering factors such as the cost of capital, return on investment, and the overall financial health of the borrower.
| 4. How do banks determine the eligibility for loan financing? | |
Ans. Banks determine the eligibility for loan financing by considering several factors, including:
1. Credit Score: Banks assess the borrower's creditworthiness by evaluating their credit score, which is based on their past borrowing and repayment history.
2. Income and Employment Stability: Banks consider the borrower's income level and stability of employment to ensure that they have a reliable source of income to repay the loan.
3. Debt-to-Income Ratio: Banks analyze the borrower's debt-to-income ratio, which compares their monthly debt payments to their monthly income, to assess their ability to handle additional loan repayments.
4. Collateral: Banks may require borrowers to provide collateral, such as property or assets, which can be seized by the bank in case of loan default.
5. Loan Purpose: Banks also consider the purpose of the loan and evaluate its potential for generating income or fulfilling a specific need.
| 5. What are the advantages of peer-to-peer lending for loan financing? | |
Ans. Peer-to-peer lending offers several advantages for loan financing, including:
1. Lower Interest Rates: Peer-to-peer lending platforms often offer competitive interest rates compared to traditional financial institutions, making it an attractive option for borrowers.
2. Ease of Application: Applying for a loan through a peer-to-peer lending platform is often simpler and faster than going through traditional banking channels, as the process is streamlined and conducted online.
3. Diverse Borrower Profiles: Peer-to-peer lending platforms cater to a wide range of borrowers, including those with less-than-perfect credit scores or limited credit history, providing them with access to loan financing that may not be available through traditional sources.
4. Flexible Loan Terms: Borrowers can negotiate loan terms directly with individual lenders on peer-to-peer lending platforms, allowing for greater flexibility in repayment schedules and loan amounts.
5. Potential for Higher Returns: On the lender side, peer-to-peer lending offers the opportunity to earn higher returns compared to traditional savings or investment accounts, as lenders receive interest payments from borrowers.
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