Bank Loans and Overdrafts A bank overdraft is a limit on borrowing on a bank current account.

With an overdraft the amount of borrowing may vary on a daily basis. A bank loan is a fixed amount for a fixed term with regular fixed repayments. The interest on a loan tends to be lower than an overdraft. Example of a loan: A business borrows 12,000 from a bank over 3 years at an interest rate of 5%. The approximate repayments on this loan would be 392 a month for 36 months (14,112). A fixed term means how many months or years before the loan has to be repaid in full. Normally a fixed term loan will be for a greater amount than an overdraft.

Overdrafts Advantages

Loans

Flexibility can change the amount borrow within limits Interest is only paid on amounts borrowed

Disadvantages

Cannot be used for large borrowing Rates of interest higher than loans

Bank can change limit at any time or ask fo money to be paid back sooner than expect Debentures A debenture is a long term loan which is usually secured against a specific asset (e.g. the factory) or the overall assets of a business. A debenture is repayable at a fixed date and has a fixed rate of interest. Debentures are different from ordinary shares because: The lender has no voting rights in the company. The loan attracts interests whereas holders of ordinary shares get dividends.

The providers of loans are paid out before ordinary shareholders in the event that the business fails (assuming there is some cash left).

An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the negative balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.

Reasons for overdrafts

Overdrafts occur for a variety of reasons. These may include: Intentional short-term loan - The account holder finds themselves short of money and knowingly makes an insufficient-funds debit. They accept the associated fees and cover the overdraft with their next deposit. Failure to maintain an accurate account register - The account holder doesn't accurately account for activity on their account and overspends through negligence. ATM overdraft - Banks or ATMs may allow cash withdrawals despite insufficient availability of funds. The account holder may or may not be aware of this fact at the time of the withdrawal. If the ATM is unable to communicate with the cardholder's bank, it may automatically authorize a withdrawal based on limits preset by the authorizing network. Temporary Deposit Hold - A deposit made to the account can be placed on hold by the bank. This may be due to Regulation CC (which governs the placement of holds on deposited checks) or due to individual bank policies. The funds may not be immediately available and lead to overdraft fees. Unexpected electronic withdrawals - At some point in the past the account holder may have authorized electronic withdrawals by a business. This could occur in good faith of both parties if the electronic withdrawal in question is made legally possible by

terms of the contract, such as the initiation of a recurring service following a free trial period. The debit could also have been made as a result of a wage garnishment, an offset claim for a taxing agency or a credit account or overdraft with another account with the same bank, or a direct-deposit chargeback in order to recover an overpayment. Merchant error - A merchant may improperly debit a customer's account due to human error. For example, a customer may authorize a $5.00 purchase which may post to the account for $500.00. The customer has the option to recover these funds through chargeback to the merchant. Chargeback to merchant - A merchant account could receive a chargeback because of making an improper credit or debit card charge to a customer or a customer making an unauthorized credit or debit card charge to someone else's account in order to "pay" for goods or services from the merchant. It is possible for the chargeback and associated fee to cause an overdraft or leave insufficient funds to cover a subsequent withdrawal or debit from the merchant's account that received the chargeback. Authorization holds - When a customer makes a purchase using their debit card without using their PIN, the transaction is treated as a credit transaction. The funds are placed on hold in the customer's account reducing the customer's available balance. However the merchant doesn't receive the funds until they process the transaction batch for the period during which the customer's purchase was made. Banks do not hold these funds indefinitely, and so the bank may release the hold before the merchant collects the funds thus making these funds available again. If the customer spends these funds, then barring an interim deposit the account will overdraw when the merchant collects for the original purchase. Bank fees - The bank charges a fee unexpected to the account holder, leaving insufficient funds for a subsequent debit from the same account. Playing the float - The account holder makes a debit while insufficient funds are present in the account believing they will be

able to deposit sufficient funds before the debit clears. While many cases of playing the float are done with honest intentions, the time involved in checks clearing and the difference in the processing of debits and credits are exploited by those committing check kiting. Returned check deposit - The account holder deposits a check or money order and the deposited item is returned due to nonsufficient funds, a closed account, or being discovered to be counterfeit, stolen, altered, or forged. As a result of the check chargeback and associated fee, an overdraft results or a subsequent debit which was reliant on such funds causes one. This could be due to a deposited item that is known to be bad, or the customer could be a victim of a bad check or a counterfeit check scam. If the resulting overdraft is too large or cannot be covered in a short period of time, the bank could sue or even press criminal charges. Intentional Fraud - An ATM deposit with misrepresented funds is made or a check or money order known to be bad is deposited (see above) by the account holder, and enough money is debited before the fraud is discovered to result in an overdraft once the chargeback is made. The fraud could be perpetrated against one's own account, another person's account, or an account set up in another person's name by an identity thief. Bank Error - A check debit may post for an improper amount due to human or computer error, so an amount much larger than the maker intended may be removed from the account. Same bank errors can work to the account holder's detriment, but others could work to their benefit. Victimization - The account may have been a target of identity theft. This could occur as the result of demand-draft, ATM-card, or debit-card fraud, skimming, check forgery, an "account takeover," or phishing. The criminal act could cause an overdraft or cause a subsequent debit to cause one. The money or checks from an ATM deposit could also have been stolen or the envelope lost or stolen, in which case the victim is often denied a remedy.

Intraday overdraft - A debit occurs in the customers account resulting in an overdraft which is then covered by a credit that posts to the account during the same business day. Whether this actually results in overdraft fees depends on the deposit-account holder agreement of the particular bank.

Overdrafts An overdraft allows you to spend more money than you have in your bank account - up to a limit agreed with your bank. You only pay interest on the overdraft money you use, and you don't have to tell the bank what you're using the money for. If you go over the limit, or overdraw without arranging it with your bank first, you may have to pay a penalty charge and a high rate of interest. Your bank will probably charge you for sending you a reminder letter, and for any Direct Debits or cheques you put through the account. The bank may also freeze your account until the overdraft is paid off - which will mean you won't have access to any money, such as your salary, paid into the account. Some banks also charge a monthly fee and a fee for setting up the overdraft, so it can be expensive if you borrow a lot of money and don't pay it back quickly. Do you need a new bank account Some banks or building societies will take all the money in your account to clear the overdraft or loan. You should consider opening a basic bank account elsewhere to have your wages paid into just in case.

Bank loans A loan is a formal arrangement, usually for a fixed period of time (which you agree at the start). If you're thinking about taking out a loan, you'll need to agree with your lender: how much money you can borrow how long you can borrow it for how much interest you'll pay You'll need to check the monthly repayments carefully to make sure you'll be able to afford them. It's also a good idea to shop around for the best deal before you make a decision. Also, make sure any debt isn't secured against your home.

Bank loan
Refers to capital borrowed from the bank. This tends to be more expensive than an overdraft. The difference between a bank loan and a bank overdraft is that a loan is granted for a specific period (say, two years), usually at a set rate of interest (that is, it doesnt vary when bank base rates vary). A bank loan is shown on the balance sheet as a long-term

liability.
Interest on the loan is recorded as an expense on the Profit and Loss Account. Any capital repayments will reduce the long-term liability on the balance sheet. Short term borrowing to help fund a temporary shortage of funds is more likely to involve a bank overdraft.

Bank overdraft
For the business, a bank overdraft is essentially short term borrowing, intended to tide the business over temporarily. Very often, the overdraft is not for a specific amount of money, but the business is given a maximum level of cash it may draw against the overdraft. A business should arrange overdraft facilities to ensure that the bank will honor cheques even though there are insufficient funds in the account to cover the value of cheques drawn. The overdraft is repayable on demand, although it is usual to agree with the bank the period for which the overdraft is required. It has the advantage that interest accrues from day to day only on the balance outstanding and it follows the flat rate of interest. A bank overdraft is shown on the balance sheet as a short-term liability.

Overdraft

Definitions (2)
1. Loan arrangement under which a bank extends credit up to a maximum amount (called overdraft limit) against which a current (checking) account customer can write checks or make withdrawals. The most common form of business borrowing, an overdraft is a type of revolving loan where deposits (credits) are available for reborrowing, and interest is charged only on the daily overdraft (debit) balance. It is, however, also a demand loan: the facility can be cancelled (and entire outstanding amount 'called') at any time by the lender at its discretion, without any warning notice or explanation. If the overdraft is secured by an asset or property, the lender has the right to foreclose on the collateral in case the account holder does not pay. Calls happen usually where the (1) borrower's credit rating falls, (2) lender has reason to believe the borrower may go into default, or (3) borrower has not 'revolved' the overdraft in a satisfactory manner and has turned it into a hardcore debt. An overdraft is approved only for a fixed period (usually one year) after which it is must be renegotiated. In the US practice (where it is called line of credit or credit Line), the borrower is often required to maintain 10 to 20 percent of the approved overdraft limit as cash balance in the account, and must demonstrate its continuing financial health by managing without the overdraft for a one or two-month period (called cleanup period). 2. Balance of a bank account in which funds withdrawn have exceeded funds deposited.

Bank Loans
Definition: A loan that a business owners gets from a bank

Although many business owners who need financing will automatically think to turn to a bank for that funding, traditionally, the paperwork and processing costs involved in making and servicing loans have made the small loans most entrepreneurs seek too costly for big banks to administer. Put plainly, a loan under $25,000--the type many startups are looking for--may not be worth a big bank's time. In recent years, however, the relationship between banks and small businesses has been improving as more and more banks realize the strength and importance of this growing market. With corporations and real estate developers no longer spurring so much of banks' business, lenders are looking to entrepreneurs to take up the slack. Many major banks have added special services and programs for small businesses; others are streamlining their loan paperwork and approval process to get loans to entrepreneurs faster. On the plus side, banks are marketing to small businesses like never before. On the downside, the "streamlining" process often means that, more than ever, loan approval is based solely on numbers and scores on standardized rating systems rather than on an entrepreneur's character or drive. You may be able to boost your chances of getting a loan by finding

a lender whose experience matches your needs. Talk to friends, lawyers or accountants, and other entrepreneurs in the same industry for leads on banks that have helped people in your business. Pound the pavement and talk to banks about the type and size of loans they specialize in. Put in the work to find the right lender, and you'll find it pays off.

Bank Loan A bank loan is usually extended for a fixed term with a pre-agreed schedule of interest and capital repayments. Interest is usually payable on the initial amount borrowed, regardless of the falling balance as repayments are made.

bank term loan

Definition
A bank loan to a company, with a fixed maturity and often featuring amortization of principal. If this loan is in the form of a line of credit, the funds are drawn down shortly after the agreement is signed. Otherwise, the borrower usually uses the funds from the loan soon after they become available. Bank term loans are very a common kind of lending.

What Does Commercial Loan Mean? A debt-based funding arrangement that a business can set up with a

financial institution. The proceeds of commercial loans may be used to fund large capital expenditures and/or operations that a business may otherwise be unable to afford. Read more: http://www.investopedia.com/terms/c/commercialloan.asp#ixzz1esl6RT1o

Commercial Loan
A loan made to a business to finance capital expenditures. "Commercial loan" is a fairly broad term, covering revolving lines of credit, as well as long and short-term debt. In any case, a commercial loan is made by a bank and is used to pay for expenses that the business, especially a small business, might not otherwise be able to afford.

commercial loan
Definition
Loan advanced to a business instead of to a consumer. Commercial loans are usually for a short-term (from 30 days to one year), secured (backed by a collateral) or unsecured, and are often advanced for financing equipment, machinery, or inventory. Banks usually require the commercial borrowers to submit monthly and annual financial statements, and to maintain insurance cover on the financed item.

Definition of COMMERCIAL LOAN

A loan given to a business not a customer. They are short term

and given for needs of the company. The statements of the company are required to maintain the loan over time.

Read more: COMMERCIAL LOAN | Definition of COMMERCIAL LOAN