Bank credit refers to the amount of money or financial resources a bank extends to its customers, which can be in the form of loans, overdrafts, or credit facilities. Bank credits enable businesses to manage cash flow, finance operations, and support short-term or long-term growth.
Types of Bank Credit:
- 1. Term Loan
- 2. Demand Loan
- 3. Overdraft
1. TERM LOAN
A Term Loan is a type of loan that is borrowed for a specific amount and must be repaid in regular installments over a fixed period. It is commonly used for funding business expansion, purchasing equipment, or personal purposes like home or car loans.
Key Features of Term Loans:
- Fixed Repayment Period – The loan is repaid over a predetermined period (short-term, medium-term, or long-term).
- Regular Installments – Repayment is done in Equated Monthly Installments (EMIs).
- Secured or Unsecured – Can be backed by collateral (e.g., property, machinery) or be unsecured based on creditworthiness.
- Fixed or Floating Interest Rate – The interest can be either fixed throughout the tenure or variable.
2. DEMAND LOAN:
A Demand Loan is a type of loan that a lender (eg Bank) can demand full repayment of at any time. Under demand loan borrower must repay the loan immediately when the lender requests it.
Key Features of Demand Loans:
- No Fixed Repayment Period – The lender can recall the loan at any time.
- Short-Term in Nature – Typically used for short-term financial needs.
- Secured or Unsecured – Can be backed by collateral or granted based on creditworthiness.
3. OVERDRAFT FACILITY
An Overdraft Facility is a financial arrangement where a bank allows a customer to withdraw more money than what is available in their account. It is like a short-term loan and is typically linked to a current account
Key Features of Overdraft Facility:
- Pre-Approved Limit – Banks set a maximum overdraft limit based on creditworthiness.
- Interest on Used Amount – Interest is charged only on the amount utilized, not on the entire limit.
- Flexible Repayment – Borrowers can repay anytime within the overdraft tenure.
- Secured or Unsecured – Can be backed by collateral (e.g., fixed deposits) or offered without security.
Bank credits help businesses smooth their financial operations, ensuring liquidity even when cash flow is inconsistent. However, obtaining bank credit requires a solid business plan, good credit history, and sometimes collateral.
