Chapter 6
Bank Loan Classification
Purpose of Financing
Another widely used loan classification is based on the purpose of financing. From this point of view, loan can be classified into two categories, which are Commercial Loan and Consumer Loan.
Commercial Loan is used to finance business needs, and can be divided into two sub-categories: Working Capital Loan and Investment Loan.
Working Capital Loan is used to finance business daily operations, such as undue Account Receivable, inventory purchasing, etc. Included in this category is a loan that is used to finance seasonal needs. There are industries that only need working capital in certain seasons. Rain coat manufacturer, for example, needs more working capital in rainy season to cope with its sales growth while there's a little working capital needs in other seasons.
Investment Loan is used to finance long term asset needs, such as plant expansion, office building acquiring, machinaries, vehicle, and other long term investment.
Although they both are Commercial Loan, there are significant differences between Working Capital and Investment Loan which can be summarized as follow:
| Description | Working Capital Loan | Investment Loan |
| Tenor | It is a short term loan, usually one year, and subject to renewal if needed, except for seasonal financing which has its specific tenor. | Usually it is a long term loan with tenor more than one year, although it also may be short term loan. |
| Loan usage pattern | In general, Working Capital Loan is a revolving loan, but it may also a non-revolving loan, depends on the usage and cycle. | Investment Loan is always a non-revolving loan. Once it was drawndown, the rest is loan repayment. |
| Credit sources of fund | Both Working Capital and Investment Loan may be funded by bank's own deposit, or International Financial Institution such as Asian Development Bank, or Special Loan From Bank Indonesia, or any combination of those sources. | |
| Scheduled/Unscheduled Loan | It may be unscheduled loan or scheduled loan, but usually Working Capital Loan has more flexiblity than Investment Loan | Investment Loan is always a Scheduled Loan. Its loan drawdown and repayment scheduled is determined in loan agreement. |
| Types | - Overdraft Facility - Demand Loan - Account Receivable Financing - Factoring - Post Import Financing - Pre-export Financing - Post-export Financng |
Usually known as Term Loan, but the term and condition of each Term Loan may different, subject to the project financing. |
The second category of loan, based on its purpose of financing, is Consumer Loan which is used to finance consumer needs (non-commercial needs), e.g. Home Financing, Car Financing, and other consumer credit.
Most of Consumer Loan is a long term credit with tenor more than one year, although it might be a short term credit. Since Consumer Loan is actually an Investment Loan, the Consumer Loan is a non-revolving loan with simple drawndown and repayment schedule, and source of funding comes from bank's own deposit.
What make Consumer Loan is different from Commercial Loan, in general, is the complexity and customization. Commercial Loan is a customized product. Although the basic products may be similar, the packaging, the term and condition, and other related things to it may vary from one borrower to another, depend on each borrower's business needs and industry characteristics.
On the other hand Consumer Loan usually is a standardized product, for example, the loan extended to buy house is Housing Loan, Car Loan is available for buying car, etc. The consideration is very simple, so does the requirement. In home financing, for example, the customers just have to provide certain percentage of down payment, and the rest will be financed by bank.