A loan is a type of debt. Debt is that which is owed; a debt is created when a creditor agrees to lend a sum of assets to a debtor. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower.
In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. Typically, the money is paid back in regular installments, or partial repayments; in an annuity, each instalment is the same amount. The term annuity is used in finance theory to refer to any terminating stream of fixed payments over a specified period of time.
The loan is generally provided at a cost, referred to as interest on the debt, which provides an incentive for the lender to engage in the loan. Interest is a fee paid on borrowed assets. It is the price paid for the use of borrowed money. Debt is that which is owed; usually referencing assets owedIn a legal loan, each of these obligations and restrictions is enforced by contract, which can also place the borrower under additional restrictions known as loan covenants. A loan covenant is a condition in a commercial loan or bond issue that requires the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances when other conditions are met.
A business loan is a loan granted by a financial institution to a nonindividual entity. Business loans can be given to sole proprietors, corporations, limited liability companies, partnerships and nonprofits.
Business loans can be used to start up a new company or to sustain one during difficult financial times. They can also be used for a variety of other reasons including purchasing inventory or new equipment, completing new construction or renovations, buying real estate, covering emergency expenses and providing investment capital needed to bid or begin work on new projects.
Business loans can be unsecured or guaranteed with some type of business-owned collateral or with the business owner’s personal assets. They can be closed or open-ended, meaning that they can either have a fixed maturity date or be available for borrowing and repayment again and again.
The decision to give a business a loan involves a multitude of factors, including cash flow, future projections, how long the company’s been in business and even the financial strength of the company’s owners or key members.
A short-term, renewable loan designed to finance the working capital needs of a business.