Meaning Of Unsecured Short Term Bank
Loan: These are
three separate words which means;
Unsecured: Short term loans which are extended
by the bank without pledging any assets of borrower as a security against the
loan.
Short Term: The credit having maturity of one
year or less then one year.
Bank Loans: The credit which is extended by
commercial bank to business firm for investment in asset.
Features Of Bank Loan: Following are the main features of
bank loan;
Self Liquidity: These loans are self liquidity
because these loans are used for investment in current assets and proceeds from
sale of current assets will enable then borrower to paid off the loan will in
term.
Collateral: Short term loan can be obtain by
pledging collateral with bank but sometimes bank feels that firms are financing
strong and do not require collateral.
Interest: Bank charges fixed interest rates
for some loan while for some it charges floating interest rate.
Fixed Rate Loan: The rate which is remain unchanged
till to the maturity. For example;
·
First
January = $5 million loan
·
Interest
rate = 10% for six month
·
Interest
amount = $5 million multiply 10% multiply 6/12 = $250,000
·
Maturity
value = $5 million + 250,000
·
Regular
interest = $5.25 million
Floating Rate Loan: The rate of interest of bank loan
which is not remain fixed till to maturity is called floating rate loan. For
example;
·
First
February: $100,000 for 4 months
·
Interest
rate = first two month = 10% rate
§ = 2 month = 25% rate
ARRANGING BANK LOAN/ ANALYSIS OF BANK
LOAN: Bank can
extends the loan on the basis of following information;
v Bank Seek Information About Firm/Customer: Bank extends loan to the
firm/customer with expectation about repayment. In order to evaluate the credit
worthiness of the borrower. The bank can evaluate the credit worthiness in the
light of five characteristics which are as follows;
a) Character Of The Borrower: When bank receives request from the customer than bank has
to check the character of the customer. By the character of customer we mean
that to judge the honesty of customer in order to evaluate the willingness of
the customer to pay loan.
b) Capacity Of The Borrower: To check the liquidity position of borrower. Bank wants the
satisfactory capital position of firm. Bank prefers those borrower who have
good current ratio which is equal to current assets divided by current
liabilities.
c) Capital: Bank
also check the financial position of borrower that either is financially sound
or weak and also its good financial position is due to assets or due to large
demand.
d) Collateral:
Pledging of any assets with bank against loan is called collateral. Bank
usually keep current assets with it. So that in case of default of borrower it
can be easily converted into cash.
e) Condition:
Bank reviews the overall condition of the borrower. If the conditions of
borrower/firm are favorable bank can extend loan to the firm otherwise not.
v Bank Seeks Information About Use Of Loan: Bank seeks information about use of
loan means before extensive of loan bank evaluate that for what purpose
customer can use the loan either for current assets or fixed assets.
v Bank Seeks Information About Repayment Method: There are two repayment methods of
loan which are given below;
1) In Normal Course Of Business: The credit which is paid off from the conversation of
current assets into cash in ordinary course of business.
2) In Abnormal Course Of Business: When short term business loans are paid off through long
term sources of funds. So, after evaluating the repayment methods bank can
extends loan to the customer.
FORMS OF UNSECURED SHORT TERM BANK
LOAN: Following are
the main forms of short term bank loans;
1)
Transaction Loan/Single Payment Loan
2)
Line Of Credit
3)
Revolving Line Of Credit
4)
Seasonal Loan
Now I can
explain all the above form of unsecured short term bank loan as under;
Transaction Loan/Single Payment Loan: L.J Gilman define it as a short
term, one time loan, payable in a single amount at its maturity.
Features: Following are the main important
features of transaction loan.
1) Transaction loan is short term bank
loan.
2) It is unsecured loan means no
assignment of collateral.
3) It is extended for specific purpose
to customer.
4) Transaction loan is extended to those
customer who needs funds occasionally.
5) The customer obtains transaction loan
by signing promissory no stating terms and conditions.
6) Transaction loan is paid off in
LUMPSUM on maturity.
7) It is short duration i.e. 30 days
Line Of Credit: Line of credit can be defined as
“credit line is informal agreement between commercial/borrower in which bank
allow the borrower to borrow up to the maximum
limit.
Features: Following are the main features of
the line of credit;
1) It is short term unsecured bank loan.
2) It is extended to those customers
which borrow funds frequently.
3) The borrower can draw credit line
when he needs funds just by signing a promissory note.
4) In line of credit borrower has to pay
interest on used amount.
5) Under this arrangement, credit
worthiness is not examined each time.
6) It is not granted loan but indicates
that if the bank has sufficient funds then bank will allow the borrower to
borrow up to a certain amount.
7) Floating interest rate charge in this
type of loan.
8) Bank required to obtain compensating
balance.
Revolving Line Of Credit: Revolving line of credit can be
define as “it is a formal/conditional agreement between firm and bank in which
bank permits/allows the borrower to borrow up to maximum limit during a year”.
Features: Following are the main features of
revolving line of credit given as under;
1) It is also short term unsecured bank
loan.
2) It is extended to those firms which
needs funds more frequently.
3) In this arrangement, borrower not
only pay the interest on used credit line but also commitment fee on unused
line of credit which is less then interest rate.
4) It is a formal agreement between
borrower and bank.
5) Under this agreement bank also set
maximum limit of credit amount.
6) Cost = interest on used line of
credit + commitment fee on unused loan.
Seasonal Loan: “The loan which is extended for
seasonal purpose is called seasonal loan”. It is short term unsecured loan
extended to those firm which work seasonally. E.g. cold drink, sugar milk loan
is extended for whole season during work. When season off then borrower needs
to make repayment of loan.