Difference Between Loans and Advances

Money is an essential element for any business, as it fulfills the short-term and long-term requirement of money. It is possible for the owner to bring all the money himself, so he resorts to loans and advances. Loans refer to loans provided by a financial institution for a particular period while advances are funds provided by banks to the business to meet the requirement of working capital which is due within a year.

The loan amount needs to be repaid with interest, in lump sum or in suitable installments. It can be a term loan (payable after 3 years) or a demand loan (payable within 3 years). In a single watt, advances also require repayment with interest within one year. Both these words are always pronounced in smae breath, but there are many differences between loans and advances which we have discussed in the article below.

Contents: Loans vs. Advances

1. Comparison Chart
2. Definition
3. Main difference
4. The conclusion

Comparison Hart

COMPARISON BASIS FOR LOAN
Means a fund borrowed by an entity from another institution, repayable after a specific period of time carrying an interest rate known as a loan. The amount of money payable by the bank for a specific period for a short period is known as an advance.
What is this? Loan facility
Term long term short term
Legal formalities less
Security may or may not be the primary security, collateral security and guarantee.

Definition of loan

The amount given by the borrower to a borrower for a specific purpose such as construction of a building, capital requirements, purchase of machinery and so on is known as a loan. In general, loans are given by banks and financial institutions. It is an obligation that needs to be repaid after the expiry of the stipulated period.

The loan carries an interest rate on the advanced loan. Before proceeding with the loan, the lending institution examines the customer’s credit report to know its credibility, financial position, and ability to pay. Loans are classified into the following categories:

• On the basis of safety:
  
  
• Secured debt: Secured debt is a loan backed by securities.
• Unsecured loan: A loan on which no asset is pledged as security is unsecured loan.
• On the basis of repayment:
• Demand loan: A loan that is repaid on demand by the lender is a demand loan.
• Time loan: A loan, which is repaid in full at a specified future date, is a time loan.
• Installment Loans: Loans that are repaid in equated monthly installments are
• installment loans.
• Based on the objective:
• home Loan
• car loan
• Education loan
• Commercial loan
• Industrial credit

Definition of advances

Advance is a source of finance, which is provided by banks to companies to meet short-term financial requirement. It is a loan facility that should be repaid within one year as per the terms, conditions and norms issued by the Reserve Bank of India for lending and by the respective bank’s schemes. They are given against securities which are as follows:

• Primary Security: Debtors, Stock Pro-Notes, etc.
• Collateral Security: Mortgage of land and buildings, machinery etc.
• Guarantee: A guarantee given by partners, directors or promoters etc.

  The following are the forms of bank advances:

 

• Short term loan: Advance in which the entire amount is provided to the borrower at one go.
• Overdraft: A facility provided by the bank in which the customer can overdrive money from his account up to a specified limit.
• Cash Credit: A facility offered by the bank in which the customer can advance money up to a certain extent against the mortgaged property.
• Purchase of Bills: An advance facility provided by the bank against the security of bills.

Significant difference between loans and advances
The main differences between loans and advances are:

Money lent by an entity to another entity for specific purposes is known as a loan. The funds provided by the institutions to the bank to meet its short term requirements are known as advances.
A loan is a type of loan whereas an advance is a loan facility offered by banks to customers.
Loans are granted for a long period which is exactly opposite in the case of advances.
There are many legal formalities in case of loan as compared to advances.
Loans can be secured or unsecured while advances are secured by an asset or a surety from the surety.

The conclusion

Now, from the above discussion, it is clear that loans and advances are two different terms. Loans are a source of long term finance while advances are given by banks to meet short term financial requirements i.e. they are repayable within a year. Interest is charged on both as well as both are repayable in lump sum or installment or on demand.