Describe the Different Types of Loans offered by Commercial Banks and Explain how Trade Credit & Equipment Loans can Provide Initial Capital Funding.

INTRODUCTION Initial in a normal economy, there are different and several

types of loans offered by commercial banks because Businesses/organisation need capital funding to operate.

Big and small companies require financial start-ups, boost to maintain operations, inventory, purchase supplies, equipment and complete other essential functions of business.

Initial Zimbabwe has about 24 banks of which 18 are commercial banks, 4 are merchant banks; 4 Building Society and One [1] Saving bank.

Commercial Banks in Zimbabwe• CBZ Bank Limited• Standard Chartered Bank Zimbabwe• Stanbic Bank Zimbabwe (Pvt- Ltd) Awarded Best Comm Bank in 2014.

• Barclays Bank of Zimbabwe Limited• NMB Bank Limited• FBC Bank Limited• Banc ABC Limited (Formerly ABC Bank)• Agri-Bank : Agricultural Development Bank of Zimbabwe Ltd• Steward Bank• EcoBank Limited• Zb Bank Limited• These are the examples of the types of Commercial

banks, they are not all listed here, just to mention a few

Start-Up Loans

They give companies/organisations the initial capital required by the applicant to start a business.

Usually the loan can be secured by the business premises or by the inventory, the business plans to purchase in – order to function, or it might be an unsecured loan based on assets and credit worthiness of the person starting the business.

This money is used to build a storefront, acquire inventory or pay franchise fees to get a business rolling. Conti...

Start-Ups Loan Requirements

Sound Business Plan, Security - Collateral Collateral i.e title deeds, land, house & some assets. Repayment period is usually shorter. 70% of Zimbabwean Entrepreneurship business is

informal. To stimulate economic activity, the government

introduced start-up loans for the Youths to curb unemployment through i.e Stanbic and CBZ start-up loans fund

Payback period is less than 12months.

Line of Credit It is another type of business loan provided by Commercial

banks. Organisations need a ready flow of money to keep operating especially with the economic ups & downs.

They may have months where they are in need for operating cash and months where they have plenty of money.

A line of credit, is secured by the facilities or inventory of the business, allows the business to draw from readily available funds the company can pay back overtime & draw again without constantly going through the loan process.

Line of Credit Requirements

It gives you cover-up especially for working capital requirements.

There is a business relationship between the organisation and the Commercial Bank.

Designed to meet short term working capital needs for example expanding inventory. It helps to cover operational expenses that can be paid back in the near team.

Collateral and repayment terms are established on an annual basis and tailored to your needs.

Seasonal businesses generally use these loans to help smooth out cycle of cash flow needs.

OVERDRAFT

Short term loan, it is given on approval.Does not require collateral or no collateral is

involved. When you breach they will just remit

interest.It can either be secured or non secured.It is short term loan from 3to 12months.

A DEBENTURE

A debenture is a long term loan that a company can take. Normally it should be repaid on a specific date.

The majority of debenture come with a fixed interest rate.

The interest must be paid before dividends are paid to shareholders.

The interest that is paid to debenture holders is calculated as a charge against profit in the company’s financial statements.

A LONG TERM LOAN They provide a set amount of capital for a particular need. It is a bank loan with a repayment period of more than one year,

generally 5 to 15 yearly repayment. It is usually taken by Companies, Institutions or Government for longer

term payback projects, i.e. Building of a new factory or purchase of new production equipment, Herald of September 26, 2014 cited a story entitled “KPMG Secures $160m for Zimbabwe Power Company (ZPC)”. According to the story the money is part of the $533m that is required for the expansion of Kariba South Power Station.

The funds have been sourced from Stanbic Bank South Africa and ZPC has since entered into an arrangement with Namibia’s power utility Nampower for the sale of 80MW as security guarantee for the Stanbic loan. A long term loan is Usually repaid using instalments.

Term loans are secured with cash, inventory, equipment, securities, or real estate.

MORTGAGE

Is a long-term loan, secured by collateral of some specified real estate property.

The borrower is obligated to make periodic instalments to repay the loan.

Failing to honour up, the lender can enforce its rights to possess the mortgaged property

A good example is CABS building property

BRIDGE LOAN Loans given to businesses who might be in need of instant

cash flow to finance a project. Bridge loans are normally obtained while the borrower is

waiting for long-term financing to go through. Bridge loans are good for temporary fix to acquisition or

business adventure as they allow borrower to act fast. This type of loan can be used for buy outs.

Bridge loans require excellent credit and proof of income. Specific to cover an immediate loan need whose funding we

don’t have. e.g. Liquid Telecoms obtained 18 000 000 from Commercial Bank Conti...

Real Estate Purchase Loans It is the same as commercial mortgage in that it is a

traditional type of financing. Financing is for purchase, refinance, or construction of

office buildings, apartments, retail buildings, industrial buildings, apartments, retail buildings, industrial buildings, medical dental offices or warehouses.

Options include owner-occupied or income –producing financing, interim or permanent financing.

The property being financed is used as collateral and the loan’s rate is determined by the loan-to-value ratio.

Hard Money LoanIt is collateralized loan where the property

that is in need of cash also serves as the collateral.

Hard money loans are temporary and usually only offered when time is of the essence, such as during a fore closure proceeding.

They usually meet the same standards other commercial loans do hence carry a high risk of default and therefore a high interest rate.

SMALL BUSINESS ADMINISTRATION LOANS

Small Business Administration loans are also dispensed by commercial banks.

These are loans made specifically to small businesses that want to begin operations and are guaranteed by different Ministries, government and other Private Organisation.

In this case, the commercial banks are the go-between that allows the business to receive the money from the SBA through the financing process. Start-up for Youth, Women, SME(s) and small entities.

These are a special type of loan and carry certain conditions and restrictions different from normal banking loans.

EQUIPMENT LOANS

Used to purchase equipment such as computers, heavy equipment, industrial/production machinery, vans, cars and other machinery.

Repayment terms are depended upon type and age of collateral.

Hire purchaseRent to buyUse now and pay laterFranchising i.e. MacDonalds, Spar KFC 3-5 yearsLeasing

CONSTRUCTION LOAN

Help pay for construction costs such as materials and labour.

Land and Subdivision DevelopmentAllows you to purchase a lot to build on or

buy land to subdivide. Subdivision loans usually allows up to 18

months to subdivide, improve and begin selling 5 years allowance.

EQUIPMENT AND VEHICLE LOANS

• Allows you to purchase computers, heavy equipment, new or used cars, vans trucks or other machinery.

• Repayment terms are dependent upon type and age of collateral.

ACCOUNTS RECEIVABLE LOANS

Allows you to pay monthly operating expenses while waiting for payments from customers.

This type of loan on having credit worthy customers.

LETTERS OF CREDIT These are an important financing tools for companies that engage in

International Trade. When business deals with issues abroad, you’ll likely need letters of credit. Its simply a guarantee of payment upon proof that contract terms between completed.

They are used to facilitate international credit purchases.

The bank only grants letter of credit if only there is an adequate line of credit established.

The International Chamber of Commerce in 1933 and revised as recently as 2007 rules to govern a standard letter of credit format accepted Internationally and are known as the ‘Uninform Customs and Practice for Commercial Documentary Credits’.

Short-Term Demand Note

A short-term demand note, the most common type of loan made by a commercial bank, extends a sum of money to the borrower who signs a document, or note, promising to repay the loan.

The funds are extended for a single purpose with clearly defined repayment sources.

DEMAND LOAN A demand loan account, the entire amount is paid to the debtor at one

time, either in cash or by transfer to his savings bank or current account. No subsequent debit is ordinarily allowed except by way of interest,

incidental charges, insurance premiums, expenses incurred for the protection of the security etc.

Repayment is provided for by installment without allowing the demand character of the loan to be affected in any way.

There is usually a stipulation that in the event of any installment, remaining unpaid, the entire amount of the loan will become due.

Interest is charged on the debit balance, usually with monthly rests unless there is an arrangement to the contrary. No cheque book is issued.

The security may be personal or in the form of shares, Govt paper, fixed deposit receipt, life insurance policies, goods, etc.

CASH CREDIT A cash credit is basically a drawing account against credit granted by the bank

and is operated in the same way as a current account in which an overdraft limit has been sanctioned.

The principal advantages of a cash credit account to a borrower are that, unlike the party borrowing on a fixed loan basis, the borrower may operate the account within the stipulated limit as and when required and can save interest by reducing the debit balance whenever he is in a position to do so.

The borrower can also provide alternative securities from time to time in conformity with the terms of the advance and according to his own requirements.

Cash credits are normally granted against the security of goods e.g. raw materials, stock in process, finished goods. It is also granted against the security of book-debts.

If there is good turnover both in the account and in the goods, and there are no adverse factors, a cash credit limit is allowed to continue for years together; a periodical review would be necessary.

BILLS DISCOUNTED Maturing within 90 days or so after date or sight, are

discounted by banks for approved parties. In case a bill, say for Rs. 10,000/- (approx. $223 USD) due

90 days hence, is discounted today at 20% per annum, the borrower is paid Rs. 9,500/- (approx. $211 USD), its present worth. However the full amount is collected from the drawee on maturity.

The difference between the present worth and the amount of the bill represents earning of the banker for the period for which the bill is to run. In banking terminology this item of income is called "discount".

BILLS PURCHASED Bills, clean or documentary, are sometimes purchased from approved customers

in whose favour regular limits are sanctioned. In the case of documentary bills, the drafts are accompanied by documents of

title to goods such as railway receipts or bills of lading (BOL). Before granting a limit, the creditworthiness of the drawer is to be ascertained.

Sometimes the financial standing of the drawees of the bills are verified, particularly when the bills are drawn from time to time on the same drawees and/or the amounts are large.

Although the term "Bills Purchased" seems to imply that the bank becomes the purchaser / owner of such bills, it will be observed that in almost all cases, the bank holds the bills (even if they are indorsed in its favour) only as security for the advance.

In addition to any rights the banker may have against the parties liable on the hills, he can also fully exercise a pledge's right over the goods covered by the documents.

FIXED RATE

Fixed-rate loans are among the most common consumer loans.

Fixed-rate loans keep the same interest rate throughout the life of the loan.

The interest rate on fixed-rate loans may be slightly higher in most cases than a variable-rate loan.

The advantage of a fixed-rate loan, especially in the case of a home mortgage, is that your payment stays the same throughout the repayment term except for slight variations to keep your escrow balance high enough to pay taxes and homeowners insurance.

VARIABLE RATE Variable-rate loans have interest rates that fluctuate

depending on the market rate or “prime” rate. With a variable interest rate, the amount you pay on your

home loan, car loan or student loan can vary each month. Variable interest rates are usually lower than fixed rates,

which make them attractive to first-time home buyers or those wishing to refinance a loan.

Using a variable-rate mortgage to save money in the beginning and then switching to a fixed rate when market rates begin to go up is a common loan management strategy.

CONDITIONS FOR QUALIFICATION

• Be Account holder for that particular bank• Creditworthy business proposal• Financial statements and management accounts• 12 months cash flow projections• Company profile• Company registration documents• Tax clearance certificate• Environmental compliance• NB:- These conditions vary from bank to bank,

country, state, continent & the type of loan required.

TRADE CREDIT & EQUIPMENT LAONS CAN PROVIDE INITIAL CAPITAL FUNDING

• BY• Advance Supply of Stock to companies i.e.

Supermarkets/Wholesalers by Manufactures.• Stock/Inventory - Consignment.• Dealership/Agency.• Provision of whole new equipments for start-

up and franchise business. i.e Macdonald, Chicken Inn

CONCLUSION

Money is the life blood of a business.Business owners need to understand sources

and uses of money or capital to be effective.However as there are various ways of loans for

start-up and running an entity the situation in Zimbabwe is not conducive to enable and fund the majority of Entrepreneurs for their business start-ups and even maintain an entity running smoothly without obtaining further credit loans.

Different Types of Loans Offered by Commercial Banks

Presented By:-Sinqobile Ndebele (Designed/Researched/Scriber) by – skn

Patrobes MugadzaLitha MoyoPamela Sibanda NgomaShalom Ndlovu

REFERENCEWEBLIOGRAPHY

• www.inc.com/encyclopedia• www.martinfowler.com• www.wikipedia,com• Credit Managers of Commercial

Banks