In business finance, a loan is a lending of funds by one or more persons, firms, companies, or other organizations to other persons, firms etc. The recipient is usually obligated to repay the principal amount borrowed and to repay interest on that particular debt before it is finally paid. Usually, banks offer a kind of loan known as a commercial loan. Small business owners can avail this loan to start or expand their existing business. Commercial loan is also available for purchasing fixed assets like real estate, and machinery used in the business like trucks or cars.
Loans can be classified in two types. One type of loan is called as revolving loans. These are generally in the form of promissory notes. In these loans, the lender may require you to return some amount on maturity. The other type of loan is called an installment loan. In this, the principal is paid monthly, and the outstanding amount is repaid over fixed intervals of time.
In case of a loan, the lender needs to know certain information about the borrower. Among this information, two main things are necessary such as the borrower’s creditworthiness and his income or financial history. Creditworthiness refers to a borrower’s capacity to take out loans from other financial institutions. The borrower’s creditworthiness can be evaluated by lenders by looking at his/her current and past records of payment. Lenders also consider the borrower’s ability to pay on time. Thus, if a borrower has recently undergone bankruptcy, then his creditworthiness will surely be affected.
In cases where creditworthiness is not a decisive factor, then the lender may consider other things like salary or assets when evaluating the borrower’s creditworthiness. One of the factors that make evaluation of creditworthiness difficult is the fact that people tend to move around a lot. This means that the credit record of someone may not be the same record in every place he/she visits. In addition, the records are prone to errors. These mistakes can adversely affect the credibility of the borrower and therefore, his/her eligibility to borrow.
When it comes to paying back a loan, both the borrower and the lender should agree on the terms. In most cases, the terms are agreed to prior to signing the loan agreement. Some examples of common loan terms are payment periods, the amount of interest, and the key takeaways. While some terms may differ depending on the country where the loan was made, the key takeaways remain the same.
Finally, the terms and conditions will determine the eligibility of the borrower to borrow. Borrowers who lack the financial history to qualify may be charged higher interest rates or fees. Likewise, those with a poor financial history may have their creditworthiness lowered. The key takeaways are that anyone can sign up for a loan, even those with bad credit. However, one should ensure that the loan they sign up for has good terms and conditions so that they will be able to pay off their debt in time.