Commercial banks occupy an important position in providing funds for meeting short as well as medium-term requirements of the business. The bank sanctions a loan on security of assets or by creating a charge on the assets of the firm. They provide financial assistance in the form of cash credit, discounting of bill, overdrafts, issue of letter of credit, etc.
Merits:
- It maintains secrecy of business information.
- By providing funds as and when needed by business, banks provide timely assistance of them.
- It is an easier source of finance because it does not involve formalities like issue of prospectus and underwriting.
- It is a flexible source of finance as the loan amount can be increased according to the requirements of the business. Moreover, the loan can be repaid in advance when funds are not required by business
Limitations: - Bank imposes stringent terms and conditions while granting loans. This affects the normal functioning of the business.
- The funds provided by the bank are for a short period and it is very difficult to extend or renew the tenure.
- The procedure for obtaining funds through this source is slightly difficult.
- The funds provided by banks in various forms are generally backed by security or guarantee.