A Beginners Guide For Loans and Advances

April 18, 2017by piyush golani0

In the times of cash crunch or financial difficulties, individuals/corporations look for ways in which they can obtain extra credit to fulfill their funding needs, business commitments, investments and much more.


There are options, which can be explored like taking a loan or an advance to meet the obligations.


Now, people often use these terms (Loans and Advances) interchangeably, but they are two separate terms having different meaning and utility. Let’s see what makes these two similar looking terms, distinct:


Point of Difference Loans Advances
Meaning Money borrowed by an entity that is repayable after a specific period and with an interest Money borrowed by an entity to meet its short-term requirements, usually less than a year.
What is it? Debt Credit Facility
Period For comparatively longer periods For comparatively shorter periods
Nature Formal Formal/Informal
Legal Formalities High Low
Security May or may not be there Generally secured by an asset or guarantee
Examples Home Loan, Personal Loan, etc. Cash Credit, Bank Overdraft, etc.


Generally, loans are taken when the amount required is significant and the entity requires it for some kind of investment that it thinks would yield higher returns than the interest rate paid on the loans or for some specific purpose that requires such significant amt.


For e.g.  Loans can be taken for buying a house or expanding the construction or for some business investment or expansion or for some personal reasons like marriage, debt consolidation, etc.


Whereas, the advances are taken for filling some short – term gaps in the financials that the entity requires so that either his business keeps running or he can fulfill his short – term goals.


Loans cater to the long – term financing needs of an entity, while the advances cater to the short – term financing needs of the entity, the fundamental similarities is that interest is charged on both, and both are repayable either in lump sum or installment or on demand.


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