All About Short-term Loan You Should Know
Overview of short-term loans
A short-term loan is a loan of less than 1 year (including 1 year). Short-term loans are generally used for the borrower's working capital requirements for production and operations.Currencies of short-term loans include the RMB and the major convertible currencies of other countries and regions. Short-term working capital loans typically last about six months, up to a maximum of one year;
The interest rate of the loan is determined according to the interest rate policy and the range of interest rate of the loan formulated by the Bank, depending on the nature, currency, purpose, mode, duration and risk of the loan, in which the interest rate of the exchange loan is divided into floating and fixed rates. The loan rate is indicated in the loan agreement and can be verified by the customer at the time of the loan application. Late loans are subject to penalty interest as prescribed.
The advantage of short-term loans is that interest rates are relatively low and the supply and repayment of funds is relatively stable. The downside is that it cannot meet the long-term capital needs of businesses and because short-term loans use fixed interest rates, business interest can be affected by fluctuations in interest rates.
The role of short-term business lending
Short-term business loans are primarily designed to meet the financial needs of retailers for large quantities of goods and for industrial companies to purchase raw materials seasonally. Short-term business loans are very advantageous for banks and borrowers. Deposits in commercial banks are usually immediate liabilities. In order to maintain a reasonable ratio between the bank's short-term assets and cash liabilities, the bank's loans should be short-term. Short-term business loans are more flexible, bank funds can be recovered in a timely manner, liquidity is good. Businesses can use short-term loans issued by banks to solve their seasonal capital needs, and short-term business loans generally do not need to provide collateral, low loan interest rates, the amount of the loan is relatively large, but also to get the bank loan responsible for the person in charge of useful business advice.
Types of short-term business loans
Self-repayable loans are generally used by businesses to purchase inventory and repay cash from the sale of inventory. This type of loan facilitates the normal cash flow cycle within the company. The procedure is as follows:
(1) Use bank liquidity and other liquidity to purchase stocks such as commodities, semi-finished or finished products.
(2) Produce a product or put the product on the shelf for sale.
(3) Sell products (usually on credit).
(4) Repayment of bank loans with cash or credit payments received. In this case, the term of the loan begins when the business needs money to buy inventory and ends (usually 60 to 90 days later) with money in the company's account to issue a cheque to repay the loan.
Working capital loans
(1)Working capital loans provide short-term credit to businesses for periods ranging from a few days to a year. Liquidity loans are mainly used to meet the seasonal peak in production and capital requirements of corporate clients. The line of credit is determined by the manufacturer's maximum demand for bank loans at any time during the six- to nine-month period. If the borrower repays all or most of the loans before the extension, the loan can usually be extended.
(2)Liquidity loans are generally secured by accounts receivable or guaranteed by stocks and are subject to floating or fixed interest based on the actual amount of the loan in the approved line of credit. Commitment fees are paid for unused lines of credit, sometimes in full availability of funds. Customers are also generally required to keep a compensatory deposit balance, the minimum amount determined by a percentage of the line of credit.
(3) Temporary construction funding
Temporary construction funding is used to support the construction of apartment buildings, office buildings, shopping malls and other permanent buildings. Although the buildings involved are permanent, the loans themselves are temporary. Loans provide builders with the money to hire workers, rent construction equipment, buy building materials and organize land. At the end of the construction period, bank loans are usually repaid by another lender (another bank or non-bank financial institution). Banks typically only lend to customers when a builder or developer has committed to obtaining long-term financing for the project once it is completed.
(4) Financing by securities dealers
Securities broker financing is used to provide short-term financing to government and private securities dealers to purchase new securities and hold existing portfolios until they are sold to clients or maturing securities. These loans are secured by government securities held by traders and are of high quality. At the same time, securities dealers are generally short-term loans, overnight to a few days, and if credit markets tighten, banks can quickly get their money back or make new loans at higher interest rates.
(5) Asset-backed loans
Asset-based loans are short-term asset-backed loans of companies that should be converted into cash in the future. Mortgage assets are generally receivables and stocks of raw materials or finished products. A bank issues a loan as a percentage of the value of the company's accounts receivable or inventory.
In the case of asset-backed loans, the borrower retains ownership of the mortgaged assets and sometimes transfers ownership to the bank, which assumes the risk that some of these assets will not be repaid on time. The most common example of such an arrangement is factoring, in which the bank effectively assumes responsibility for the collection of accounts receivable from the customer. Banks typically charge higher interest rates on loans and lend at a lower rate than the client's assets because of the additional risks and fees involved.