Various Types of Loan Provided by Banks in Nepalese Market.

Term Loan = Usually used to finance a Project for the expansion, diversification and modernization of
projects. Purchase of Vehicle/Machinery/Building etc are some example. It is also called project
financing. This type of loans are repayable in the periodic installments. In general sense, it is said to be a
payments of Equal Monthly Installments(EMI). It is of secured loan. Generally, asset of the company
serve as collateral security. Interest and principal repayment are obligatory on the part of borrower.
Whether the firm is earning profit or not, term loans are being repaid over a period of time. It is
generally of 5 to 10 years.

Note: Debt financing is beneficial only if the IRR is greater than its Cost of Capital, otherwise it adversely
affects the benefits of Shareholders.

Cash Credit(Bank OD) = It is for short term source of financing. In this bank offers its customers to take a
loan upto a certain limit. It is also called Bank Over Draft. This loan is given to meet the Working Capital
Requirements of a company. It is given against collateral security. It can be obtained very easily. The rate
of interest charged is very high. It is charged only on utilized amount. This loan is granted by bank on the
basis of company’s turnover, its financial status, value of inventory etc. So, it is very difficult for new &
financially weak company to obtain cash credit. By this generally the credit planning of a company is
disturbed.

Demand Loan = it is the loan that can be called at any time by the lender. It is also called Call Loan. The
lender (Bank) can demand full payment of the remaining balance of the loan at anytime. Before, lender
grants this type of loan, the borrower agrees to the arrangement. The demand loan has no maturity
date. It expires when it has been paid off. It doesn’t have scheduled date for making payments. In this,
there is good understanding that borrower will settle the debt within reasonable period. So, lender
doesn’t provide demand loan until the borrower has a good history with the lender. Bank OD is also in
some case considered as Demand Loan. Demand Loan has low interest rate but can be repossess
anytime by the lender.

Short Term Loan = Short term loan is obtained to support temporary personal or business capital need.
It involves that interest and principal needs to be returned or paid back at a given due date. It is usually
of less than a year. Interest rate is lower as compared to long term debts. In this, the borrower can
obtained the needed fund as quickly because of Unsecured in nature. A smaller loan amount is
disbursed because borrower won’t be feel burdened with large monthly installment. Generally. This
type of loan is more focused to the smaller business.

Funded Loan = Working Capital loan, Overdraft, Cash Credit, Demand Loan, Term Loan, Bills discounting,
Factoring are its example. In this, Actual disbursement of money is involved.

Non funded Loan = Letter of Credit, Bank Guarantee, Bid Bond, Performance Bond etc are some
example. In this, Bank doesn’t give any cash but take risk of the companies & charge commission.