Identify and Explain the Four Types of Loans Used for Cash

question 60

Essay

Identify and explain the four types of loans used for cash flow financing.
A.Installment loans - Installment loans can be obtained by a venture with a track record of sales and profits.These short-term funds are frequently used to cover working capital needs for a period of time,such as when seasonal financing is needed.These loans are usually for 30 to 40 days.
B.Straight commercial loans - A hybrid of the installment loan is the straight commercial loan,by which funds are advanced to the company for 30 to 90 days.These self-liquidating loans are frequently used for seasonal financing and for building up inventories.
C.Long-term loans - When a longer time period for use of the money is required,long-term loans are used.These loans (usually available only to strong,mature companies)can make funds available for up to 10 years.The debt incurred is usually repaid according to a fixed interest and principal schedule.The principal,however,can sometimes start being repaid in the second or third year of the loan,with only interest paid the first year.
D.Character loans - When the business itself does not have the assets to support a loan,the entrepreneur may need a character (personal)loan.These loans frequently must have the assets of the entrepreneur or other individual pledged as collateral or the loan cosigned by another individual.Assets that are frequently pledged include cars,homes,land,and securities.

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Definitions:

Revocability

The ability to nullify, cancel, or repeal an agreement or contract.

Assignments

The transfer of rights or property from one party to another, often used in the context of contracts or legal agreements.

Promisor

A party in a contract who has agreed to perform a duty or obligation to another, known as the promisee.

Intended Third-party Beneficiary

A person who is not directly involved in a contract but is intended by the contracting parties to benefit from the contract.