Bank loans for businesses & individuals, loans from NBFC/NBFIs, government agencies, insurance firms, online lenders, invoice financing, crowdfunding, etc., are different sources of credit.
A credit is a loan issued to another by one person. A lender is a party that loans and a borrower are the recipients of the loan. In terms of repayment structure, interest rates & collateral securities, there are predetermined terms between the lender and the borrower. Some of the sources of loans available to companies & individuals are below. Such loan sources suit various needs and it is ideal to properly analyze the requirement and select a suitable loan.
A very good source of finance is taking a loan from family & friends or other relatives, particularly when the loan needed is a small sum. You will discuss security conditions, loan terms, and interest rates solely based on your relationship with the lender. In fact, such loans are often also interest-free & security-free, just because the lender has a strong link with the lender.
PUBLIC & PRIVATE BANKS
The first place that comes to mind is the bank if someone talks about loans. That is because the banks are in the lending business & they have so many borrowers’ loan products that it becomes easy for the borrower to find a loan that fits his requirement perfectly. The broad types of loans that banks provide are as follows:
- Term loan: A term loan is a lump sum loan, whether for buying real estate, machinery, or working capital, for any business reason.
- Working capital/cash credit: A loan for working capital is for the purpose of funding a company’s regular activities. This money can’t be used by the creditor to purchase properties or savings.
- Equipment financing: This loan provides the road ahead when a business needs to purchase new equipment or a computer but does not have the necessary cash. To purchase the equipment, the loan is extended & the equipment itself serves as the collateral.
- Personal loans: Personal loans are useful for financing something like a trip, renovation of a house, weddings, etc. Without any collateral or security, one may make use of a loan, but proof of income is a must.
- Home loans: Banks provide home loans to purchase a house where the house serves as collateral.
- Auto loans: An auto loan enables a creditor to purchase a vehicle where the car serves as collateral.
- Education loans: A bank Sanctions education loans directly to cover higher education costs. For such loans, the bank normally has a guarantor. The guarantor has to repay the loans in case of default.
NBFC’S / NBFI’S
NBFC/NBFI stands for non-bank financial companies/non-bank financial institutions. There are organizations that are in the business of lending to individuals and corporations, but not recognized banks. The advantage of borrowing from an NBFI is that they have more relaxed customer policies. It is easier to get a loan from NBFI than from a bank, particularly when you have a low credit score. The downside is that NBFI typically charges higher interest rates for the loan than bank charges.
In order to assist the smaller or increasing sectors of society, the government creates special agencies to extend loans. In India, for example, there is an institution named NABARD (National Bank for Agriculture & Rural Development), which provides loans exclusively to the rural population, and in the United States, there is SBA (Small Business Loans), which provides loans exclusively to small businesses. Their policies towards borrowers are relaxed and interest rates are also low, as the aim of these institutions is to give impetus to growing sectors.
LIFE INSURANCE COMPANIES
The main purpose of a life insurance policy was originally to have security protection, but nowadays they give policyholders the advantage of using a loan against the life insurance policy. One has to verify with the insurance provider the amount of loan they are liable for. The loan amount is a percentage of its surrender value. Loans can usually be up to 85-90 percent of the surrender value. The interest rate in case of a loan against an insurance policy is based on the premium already paid and the number of premiums that have been paid. The greater the value of the premium and the number of premiums collected, the lower the interest rate charged.
Following the 2009 recession, bank lending tightened. This offered technology companies a great chance to get into the business of lending & making money. It works the same as borrowing from a bank or NBFI’s except the whole process is online. Usually, these online loans are more costly than bank loans. Some of the biggest names in online lending are Prosper Marketplace Inc., Lending Club Corp., and many more.
INVOICE FINANCING COMPANIES
It is a common financing option for businesses. The businesses get money as soon as the invoice is generated. Invoice financing companies lend against business invoices. In a way, a company’s invoices are collateral to the lender & as the payment starts to come from outstanding invoices, the payment goes to the lender. As a fee for borrowing the money, companies pay a percentage of the invoice amount to the invoice financing firms. There are many exclusive invoice financing companies such as Universal Funding Corporation, Rivera Finance, etc.
The concept of crowdfunding is borrowing a small amount of money from a large number of people. Crowdfunding allows borrowing equity capital or loans. The best part of running a crowdfunding project to raise loan money is that it offers a lot of flexibility to the borrower in terms of interest rates, repayment structure & collateral protection. The danger is that a crowdfunding project may or may not succeed, since a large number of individuals must be convinced to lend. With the rise of social media, this form of loan came to prominence.