1. If a lender A has a first Charge on Property XYZ and Lender B has a Second charge on the same
property , and the Company creates a subservient charge in respect of the same property then in case of
nonpayment of the Loan the subservient holder will get which is left after paying First to A and then to B,
in that case subservient holder may or may not get his amount.
First charge over the property means the lender gets first right to appropriate his dues on disposal of
the property and hence any subsequent mortgagee only get the surplus if any after sale of property.
Whereas in the case of pari pasu charge (no first pari passu in such case, all the participating lenders
get share of the sale of the property, proportionate to their quantum of release of loan, in a
consortium or multiple lending.
What is the meaning of pari passu charge?
Pari Passu is a term used in banking transactions which means that the charge to be created is in
continuation of an earlier charge which might be held by the same institution or by an other
institution.
What is meant by Parri Passu Charge?
Parri Passu is derived from Latin for 'with equal progress'. The phrase is used to indicate
simultaneous and equal change or to describe similar ranking of securities or lenders; for
example, when a new issue of shares is made, they could be said to rank pari passu, ie, equally
with existing shares for the purposes of dividend payments. A common agreement between joint
lenders is a pari passu clause under which, in the event of a shortfall, they agree to share equally
whatever is available.
The use of "Pari Passu" when creating a charge means that when company Y goes into
dissolution, the assets over which the charge has been created will be distributed in proportion to
the creditors' respective holdings. Therefore, if the Bank X has tendered a loan facility of 60
million PKR while another creditor, say Z, has tendered 40 million PKR, the recovery after
selling assets of Company Y to which joint pari passu charge attached, shall be distributed in the
ratio of 6:4 amongst X and Z. Where preferential rights attach to assets of the company, the
preferential creditors rank higher in the distribution stakes i.e. they are paid in priority to other
creditors of the company

2. Types of Business Loans
After a small business owner has taken all the necessary steps to begin to establish a positive
credit history through vendor lines of credit and small credit cards, applying for other types of
business loans becomes a more realistic option. At this point, understanding the different features
that can be included in a business loan is very helpful when trying to determine which business
loan is the right one for you.
Agreements: Often, the business owner must agree to maintain accurate financial statements and
business records, to perform at certain standards based on financial ratios, and keep their tax and
insurance payments current.
Collateral: In a business loan, collateral is a security or guarantee (usually of an asset) that is
pledged to cover the repayment of the loan if the borrower fails to meet the terms of the loan.
Common types of collateral are real estate equity, accounts receivables, and business inventory
and/or equipment. The key variables that often determine whether or not collateral is required in
a business loan are number of years in business and size of the business. Three years is typically
the minimum amount of time a financial institution will require a business to exist before
waiving the requirement for collateral. However, when it comes to the size of the business, this
criteria can be determined by number of employees and/or amount of revenue generated. Many
lenders’ loan programs are designed to target certain sized businesses, so it is very important to
do your research when it comes to potential lending institutions.
Covenants: A loan covenant is a condition that a borrower must comply with in order to adhere
to the terms of the loan. If a borrower does not meet the covenants, the loan can be considered in
default and the lender is given the right to demand payment in full. Lenders typically require
covenants in a business loan to maintain loan qualify, keep sufficient cash flow, preserve the
equity in a loan, to maintain capital structure in situations where this is a weakness, and to keep
an updated portrait of a borrower’s financial performance and conditions. Common business loan
covenants include proof of hazard/content insurance, proof of life insurance for the owner or
manager without whom the company could not contninue (lender is listed as beneficiary to cover
loan amount), current taxes/fees/licenses, submission of updated financial statements of the
business (used for continuing assessment by the lender), and minimum financial ratios related to
liquidity and profitability and leverage. In addition, the lender may prevent a borrower from
doing certain things, including changing management or merging without prior approval,
incurring additional debt, and eroding the net worth of a company through dividend payments or
stockholder withdrawals (often limited to owners’ tax liability).
Interest Rate: This the specified percentage that will be charged by the lender as payment for
use of the funds issued. These rates can vary depending on the length of the loan term, the type
of loan they are associated with, the amount of the loan being issued, and the credit rating of the
business applying for the loan.
Personal Guarantee: When a lender requires the personal guarantee of the business owner, that
means that even though the loan is described as a “business” loan, the borrower’s personal credit

3. history will be used to qualify for the loan, the activity of the business loan will be reported to
the personal credit bureaus through the business owner’s Social Security Number (SSN), and the
business owner’s personal assets can be seized in the case of non-payment. A personal guarantee
is still binding even if the business is corporation that is a separate entity from the borrower.
Promissory Note: This is the document that describes all of the terms of the loan. Often the
Loan Agreement and the Promissory Note are combined into one comprehensive document.
Repayment Schedule: The required repayment schedule may dictate monthly, quarterly, or
lump sum payments. However, some loan programs allow these payments to be deferred or
delayed in order to allow your business to generate cash flow.
Representations: These are statements of fact or declarations made by the lender within the loan
document. One example of a business loan representation would be that all liens against the
business are disclosed.
Restrictions: The lender may also place additional restrictions on the total debt a business agrees
to incur, the amount of dividends or other payments to owners and/or principal investors capital
expenditures, the sale of fixed assets.
Secured Loans: Some loan programs may require a compensating balance to be held in a special
account as collateral during the life of the loan. These balance requirements can be any amount
from a small percentage of the loan amount to the full amount of the loan. When all of the terms
of the loan have been met and the loan has been paid in full, the collateral deposit is returned to
the borrower.
Term: This is the period of time that covers the life of the loan. There is a wide variety of loan
programs that cover all kinds of different loan terms, so make sure that you apply for a loan that
meets your immediate and long-term needs.
Warranty: In the case of a business loan, a warranty is an assurance by one party involved in
the loan to the other that affirms that certain facts and/or conditions are true at the time of the
loan or will happen during the life of the loan. Both the lender and the borrower are obligated to
uphold any warranties that are part of the loan and seek some type of remedy if the warranty is
not true or followed.
Once a borrower understands all the features that can be included in a business loan, the next
step is to research the various types of business loans that are available in order to determine the
best loan program for your needs.
Collateralized Loans: It is very common for a loan program that is designed for small
businesses to require collateral in order to secure a loan. Simply put, this means that the financial
institution that agrees to lend money to a business has the right to seize and sell the items that are
agreed upon collateral in order to compensate the lender for any loss it might incur if a borrower
fails to repay the loan in full. Because of the ability to recoup its losses in case of default, a
collateralized loan is much less risky for the lender and much easier to qualify for as a borrower,

4. especially if there are any other weaknesses in your credit profile. According to the terms of the
loan, the collateralized items must not be sold or transferred to another owner during the life of
the loan. In certain situations, the financial institution may require physical possession of the
collateral during the life of the loan; however, it is very typical for a business to retain its
collateralized assets until the need arises to surrender the items to the bank in order to repay a
loan that is in default.
Installment Loans: These types of business loans require repayment over the life of the loan
through a number of regularly scheduled payments. The term of an installment loan may be as
little as a few months or as long as 30 years.
Line of Credit: Often a small line of business credit is the first type of business loan that a
financial institution will agree to lend a small business with newly established credit.
Unfortunately, just like with personal credit, often the first lines of business credit issued to a
newly established business are extended at relatively high interest rates and may have some
significant fees associated with the loan. However, once the business owner has demonstrated
the ability to make timely payments and ultimately repay the loan in full, the financial institution
will be willing to increase the loan amount, decrease the interest rates, and reduce the fees.
Seasonal Commercial Loans: These types of loans are ideal for businesses whose inventory
fluctuates from season to season. Typically the loan terms allow a business to borrow a certain
amount of money during the time of the year when the company’s cash flow is lowest because its
inventory is low or being developed. According to the terms of the loan, the business has until
the end of the season to generate income by selling their inventory and repay the bank.
Small Business Association (SBA) Loan: The SBA does not typically deal directly with small
businesses when it comes to loans. Instead, they offer special financing and incentives to local
community development organizations and smaller financial institutions through government
guarantees.
Term Loans: These kinds of loans are the most basic commercial loans available. Typically,
term loans carry fixed interest rates, monthly or quarterly repayment schedules, and a set
maturity date. Term loans are very appropriate for established small businesses that possess
sound financial statements and a substantial down payment to minimize monthly obligations and
total loan costs. Often, these types of loans are categorized into two classifications: intermediate-
term loans and long-term loans. Intermediate-term loans usually run for fewer than three years
and are repaid through fixed monthly installments or a balloon payment at the end of the life of
the loan with repayment being fixed to the useful life of the asset being financed. On the other
hand, long-term loans commonly have a term of more than three years. Most have a term
between three and ten years, with some long-term loans running as long as 20 years. Most long-
term loans require the collateral backing of certain assets and require either quarterly or monthly
repayment. Often, limitations on additional financial commitments are built into the terms of the
loan, and they sometimes require a certain amount of a company’s profits to be set aside to repay
the loan commitment.

5. What is an unsecured loan?
An unsecured loan is a loan that is not backed by collateral or security. These loans are
based solely upon the borrower’s credit rating. As a result, they are often much more
difficult to get than a secured loan, which also factors in the borrower’s income. An
unsecured loan carries less risk to the borrower. However, when an unsecured loan is
granted, it does not necessarily have to be based on a credit score. It may be based on
historical payment history on prior debt, reflecting in your credit score.
Decision criteria for making unsecured loan
Since unsecured loans are not secured against property or any asset, it is more difficult
for a lender to get their money back if the borrower defaults on the loan. An unsecured
loan has higher risk as compared to secured loan and hence has stricter underwriting
rules. In particular, lenders will look at the potential borrower’s credit history and how
they have conducted their previous and current credit or loan accounts.
Interest Rate determination.
Interest charged on unsecured loans normally depends on the loan amount and level of
risk. Generally speaking, the higher the loan amount the lower the rate will be and the
higher the risk the higher the rate charged.
What is a secured loan?
A secured loan is a loan that is backed by collateral. In the event that the borrower
defaults, the creditor takes possession of the asset used as collateral and may sell it to
satisfy the debt. Secured loans relieve creditors of most of the financial risks involved
because it allows the creditor to take the property in the event that the debt is not properly
repaid. On the other hand, debtors may receive loans on more favorable terms than that
available for unsecured loan. They can also be extended credit under circumstances when
credit under terms of unsecured loan would not be extended at all. They can also be
offered loan with attractive interest rates and repayment periods.
Decision criteria for making secured loan.
Since secured loans are secured against property or any asset, it is easier for a lender to
get their money back if the borrower defaults on the loan. A secured loan has lower risk
as compared to unsecured loan and hence has less strict underwriting rules. In particular,
lenders will look at the value of asset used as collateral or security for the loan.
Interest Rate determination
No doubt, secured loans are always provided at lower rate than unsecured ones, it also
depends on the credit score of the person asking for loan and the liquidity of the
collateral. Highly liquid collateral allows you to get secured loans on lower interest rates.

6. Generally the interest rate increases as the liquidity of the security decreases. If a person
has a perfect credit history and excellent credit scores, the secured loans are provided at
one of cheapest rates. Similarly, if a person has a bad credit history and low credit scores,
he can get the secured loan after providing ample security, but the secured loan would be
provided at higher interest rates.
Long term loans:
Loans are considered as long term loans if they are for more than three years by the
definition of most financial institutions. However, most long term loans are for more than
ten years, and, in fact, can be as long as twenty years. A long term loan will generally be
put up against collateral or security. Whether it is property, equipment, or some other
asset, there usually has to be something securing a long term loan. The rate of interest for
short term loans is never fixed arbitrarily. The magnitude of the loan amount, length of
the payment period, records of the regular source of income of the person taking loan and
his collateral status are seriously counted prior to fix the rate of interest.
Advantages of long term loans:
• Long-term loans are usually available are cheaper rates. As long term loans are secured
by collateral the lender charges lower interest rates.
• Long term loam allows one to borrow large amount.
Disadvantages of long term loans:
• Long term loans are subject to interest rate fluctuations.
• The total interest paid is substantially higher in case of long term loans
Short term loans:
Short term loans are designed for shorter repaying duration and therefore are not bound
by long term obligation. Short term loans are obtained for a smaller amount as you need
to repay it quickly and may be provided for any purpose including educational expenses,
home improvements, auto repairs, clearing smaller debts etc.
Advantages of short term loans:
• Short term loans do not usually require collateral
• Short term loans are made available in several days or even hours
• Short term loans require little paperwork
• Short term loans provide you with money when you feel a sudden unexpected need
• With short term loans you do not burden yourself with long term obligations
Disadvantages of short term loans:

7. • Short term loans are usually more expensive. As short term loans are not secured by
collateral the lender raises interest rates to cover the risk they bear with your short term
loan.
• The lender of short term loans is likely to investigate the credit history of the borrower
and it will be offered only when it is found satisfactory.
• Short term loans are obtained for a smaller amount.