Money is an essential part of any business. Without money, it would be very
difficult to run any business. Banks and financial institutes are the best way to raise
funds for any business. Banks have many options for financing our business or
project. Among them, Loans and Advances are the best options for business fund
requirement which are very popular in the financing of the business.
What are Loans?
This is the best and very popular financial facility provided by a bank or other
financial institutes to help businesses at the time of money requirement. Finance is
the blood of any business. So, when it becomes difficult to arrange finance by the
owner himself, then the businesses can use this option to arrange funds for their
business. This financing option is provided for the long term. Loans are a type of
debt and have a repayment schedule for a longer time duration.
What are Advances?
Advance is a kind of credit facility provided by banks or financial institutes for
covering daily fund requirements or as working capital. When a business needs
money to cover their daily expenses such as salary, wages, or purchasing raw
materials, they can think over this kind of credit facility from the banks. It is a
cheaper and convenient way of arranging short-term finance as banks charge very
low interest and charges on it.
Example of Loans and Advances
There is one company that is looking for external funds for its business as it
became so difficult for the business owner to arrange funds from his personal
sources. The business owner requires funds for two purposes,
As working capital (for daily expenses such as salary, wages, raw materials, etc.)
and
For buying machinery for his business.
So, the business owner considers arranging funds from banks and other financial
institutes. Let’s assume that the business owner approaches his bank where he has
the firm’s current account.
Now the bank suggests two options to consider for funds, one is called Loan and
the other is called advances which is credit facility in nature.
Bank suggests choosing a loan option for buying machinery because it requires a
huge amount for buying machinery and business owner will be paying in longer
duration. Bank will charge interest on that and some other charges would be
included in the repayment schedule. This option is considered to be good when any
business needs a huge amount for its business and that amount can’t be repaid in a
shorter duration i.e. 6-12 months and loans would be paid in equal monthly
installment. The pre-closure option is also available if the owner wants to close the
loan before loan tenure.
But for daily expenses, the bank suggests choosing advance credit option which is
credit facility given by the bank to businesses where a business has to repay the
outstanding amount in shorter duration. So Advance credit facility is for shorter
duration i.e. 1-2 months. This is a cyclic process, once you repay the amount used
as Advances, you can use the same amount for further requirements.
A loan will be sanctioned and has to be repaid fully. When someone needs another
loan for the same purpose, he has to repay the full amount with interest within a
predetermined period.
But on the other side, money taken as advance have to be cleared in one
transaction with some small bank charges.
Key Differences between Loans and Advances:
The following are the major differences between loans and advances:
 Money lent by an entity to another entity for specific purposes is known as
Loan. Money provided by the bank to entities for fulfilling their short term
requirements is known as Advances.
 The loan is a kind of debt while Advances are credit facility granted to
customers by banks.
 Loans are provided for a long duration which is just opposite in the case of
Advances.
 There are many legal formalities in the case of loans as compared to
advances.
 Loans can be secured or unsecured whereas Advances are secured by an
asset or by a guarantee from a surety.

Difference between loan and advances
Basic
Loan
Advances
Meaning
When a fund is borrowed by an
entity or business corporation or
an individual from another
entity, repayable after a specific
period carrying interest rate is
known as loans.
When a fund is provided by the
bank to a business corporation or
an entity for a specific purpose to
be repayable after a short
duration is known as advances.
A loan by nature is a debt.
Advances are by nature a credit
facility.
Nature
Time duration
Loans are generally for a long Advances are for short term,
term.
maximum for one year only.
Collateral
security
Advances are facilitated only
A loan is may be secured against
against primary security or ant
collateral security on not.
type of guarantee.
Legal
formalities
There are legal formalities while There is low legal formalities as
granting a loan.
compared to the loan.
Example
Short term loan, Overdraft
Auto loan, Personal loan,
facility, Cash credit, Bill
Education loan, Home loan etc.
purchased etc.