Short Term Bank Loan

In the case of short term finance, unsecured bank loan is one of the popular
sources of finance. This kind of loan may be of different types.

For example, in
the case of short term bank loan, usually interest with principle amount has to be
repaid at a time after a specified time period. Many times, bank tries to collect
full portion or part of the sanctioned loan before the specified time period and for
this purpose bank gives discount on the total amount receivable as an incentive
of earlier payment. For example, if a creditor repays 6000  before the expiry
of the credit term of 6 months, then he can give 2% less than the total amount,
that means, the creditor can repay 4800 .
Besides, if the creditor agrees to repay on demand instead of agreeing on a fixed
term, then this type of loan is called “Demand Loan”.

The institutions which
have alternative sources of finance can use this source at a low cost of capital.
Bank Overdraft is another type of short term bank loan. Every institution usually
realizes its receivables and repays its payables through current account. This type of
bank account mainly gives to its account holders the opportunity of withdrawing
more than the amount of savings in this account; however, the bank restricts the
maximum amount of overdraft. Generally, finance collection from this type of
source is a well-known system for those institutions where sales decrease for some
time of a year.

As an example it could be mentioned, an ice cream factory spends
money throughout the year for production, warehousing, management etc. but
maximum amount of ice cream is sold in Summer season, so for the purpose of
financing in other time of the year this type of source can be used. Generally, in the
case of other types of loan, interest has to be paid till the full repayment of loan, but
interest for such types of loan has to be paid only when this loan is being used.
However, the rate of interest of this type of loan is higher than the other types of
loan and it is repayable on demand.

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