What Does Loan Disbursement Mean?

Everything you need to know about disbursement.

If you are a small business owner or looking to be a small business owner, one of the first key things you should educate yourself on is all payment-related processes. It is okay to make mistakes in the beginning which might mean fees, failed audits and even penalties. This is why it is important to know every which way the cash flows when making payments out of a business.

If you want effective cash management, you will have to start with knowing what disbursements mean and when to make them.

What is Disbursement?

Disbursement essentially means a payment. This payment of money is sent to a beneficiary or account hold and comes from a fund. The account can be a bank account for conducting business or estate, trust or escrow account in some financial institution. For example, funds are disbursed in companies every month for their employees in the form of paychecks.

Cash disbursements help measure the amount of money that is actually flowing out of a company. It can vary depending on the company’s profit or loss. This form of payment is from a dedicated fund on behalf of a client or a public fund to a third party where reimbursement is subsequently sought.

In general, disbursement describes the spending and distribution of money from any financial institution.

What Does Loan Disbursement Mean?

Once a loan account has been approved, your loan is ready to be disbursed. Users that have “Set Disbursement Conditions” permission active can either add or change the disbursement details on inactive loan accounts. This will allow disbursement details definition when the loan application is posted. Users that do not have “Set Disbursement Conditions” would not be able to change them. They will, however, still be able to post the disbursement on the account.

The disbursement details impacted by this permission are:

  1. Disbursement fees.
  2. Channel type and its fields.
  3. Anticipated disbursement date.
  4. First repayment date.

Before the loan is disbursed, the disbursement details are displayed in the “Disbursement Details” section on the account overview until the loan is activated. These details can be changed after the account is created and a full audit trail for any changes made is kept.

A loan disbursement can be negative or positive. A positive disbursement will result in a credit to an account whereas a negative disbursement results in an account debit. Examples of a negative disbursement is clear when funds are drawn from a student’s account after the funds were overpaid for financial aid.

A student loan disbursement is the process of paying out the loan proceeds to the student, who is the borrower. The disbursements, including the amount of the loan and the expected disbursement date is given to the students in writing through a notice by the school and loan servicers. The Federal and private student loans are then disbursed. These disbursements are typically made two or more times during the school year.

When providing financial aid to students, the school receives the funds for students’ financial aid directly from the federal government and private lenders. When the school’s financial aid office disburses the funds, you can pay your tuition, fees, living expenses in the form of a credit to your student account. If there are any remaining funds, your school’s financial aid office will direct the funds to you in the form of a check or a direct deposit. The method can vary so check with your school and confirm how you will be receiving any leftover aid. Once that is confirmed, you will receive payments through an agreed upon method.

If you are in a work-study program, disbursements will happen a little differently for you. You will receive the disbursements directly in the form of a direct deposit or a check. However, you can choose to request that your school apply these funds to your student account.

You can either cancel a student loan or grant up to 120 days after the disbursement is done without paying fees or interest charges. You should keep in mind that you may be required to pay outstanding tuition and fees out of your own pocket or have an already secured alternate source of funding. Before you can get the student loan disbursements you need, it is essential to complete the FAFSA. Once this free application for federal financial aid is complete, you will be on the road to an affordable college experience.

What is the Difference Between Disbursement and Payment?

Disbursement of funds is not the same thing as reimbursement of funds. The term “reimbursement” refers to the payment that is refunded for the original disbursement.

When a disbursement is sent by a business on behalf of a client, the reimbursement is paid by the client to the company as a refund for the original payment. Reimbursement usually involves interest fees or discounts depending on the contract.

In general, the difference between a payment and disbursement is that payment is the act of paying whereas the other is the instance or process of disbursing. From a VAT point of view, the two systems cannot be more different. This is because payments are subject to VAT whereas disbursements are not.

An important thing to note is that if an organization is trading close to the VAT registration threshold, there can be a breach of the VAT registration gateway if there is a wrong classification of expenses.

To treat a payment as a disbursement, there is a criteria it should meet. The following rules should apply:

  1. You had the client’s permission to pay for them.
  2. The goods/services you paid for were received, used or had the benefit of by the client.
  3. You acted as the agent of your client and paid the supplier on your client’s behalf.
  4. The client was aware that the goods/services were not from you but another supplier.
  5. There is a cost breakdown separately on an invoice.
  6. The client is responsible for paying the goods/services instead of you.
  7. The exact amount is passed on to the client when you invoice them.
  8. The goods/services you paid for include an addition of your own cost.

One good example of disbursement is a solicitor paying the stamp duty land tax (SDLT) on behalf of a client. This would be the client’s expense and the SDLT will be the buyer’s responsibility and not yours.

A student loan is another form of a payout, also referred to as a loan disbursement. The payment of money for financial aid comes from the source of aid which can either be the school, government, private lender or etc. It is usually paid directly to the school.

The key consideration to keep in mind between disbursement vs. reimbursement is who the expense belongs to. If you can get that right, you can determine the difference between the two easily. Otherwise, your business might get penalized when audited. It is also essentially the primary way you can ensure your employees will be paid properly and the taxes will all align correctly.

Disbursement Voucher

A disbursement voucher (DV) is a form that is submitted in order to have a check prepared for payment. This money is then used to pay an organization or individual for goods or services used. There can be multiple payees for a DV. It depends on what debt is being settled. These payments are generally made through clearing or deposit bank accounts. The voucher is then filed with financial statements.

Disbursement Check

In the business sense, the term “disbursement” actually means a method of payment for several different types of transactions. It does not necessarily have to be a specific payable. If you are writing a check from a business account, referring to the payment as a disbursement check would be appropriate. However, this term is never used for personal finance.

Disbursement checks can be created by companies for various different payment types including:

  • Employee salaries.
  • Payments to suppliers, vendors and contractors.
  • Payroll expenses.
  • Reimbursements to workers for any out-of-pocket expenses.
  • Profit distributions to other business owners.
  • Dividend payments to shareholders.

Cash Disbursement

Cash disbursement is also known as cash payment. It can be made by a business during a specific time period which can be a quarter or year. This cash outflow is used to settle obligations like interest payments, accounts receivables, operating expenses, etc by the company.

Payment options for cash disbursement can vary. These include cash, checks or electronic fund transfers (EFT). If you are using a check, you should expect a delay before the funds can be withdrawn. The delay will only be a few days but it is necessary because of mail and processing floats.

Cash disbursements are also used to refund a customer. This is recorded as a reduction of sales. A similar kind to cash disbursement is a dividend payment which is recorded as a reduction in corporate equity.

The accounts payable system is usually used to make cash disbursements. However, funds can also be disbursed through petty cash or payroll. Each entry that is on your records should include the necessary details such as the amount, payment method, date and the purpose of the transaction.

The entire process of cash disbursement can be outsourced to a bank. The bank will then issue the payments on the date authorized by the paying entity while using the funds that are in the entity’s savings or checking account.

Controlled Disbursement

Controlled disbursement is a technique that is generally used in corporate cash management. It can help larger companies monitor and structure their payments while still benefiting as much as they can from earned interest.

It can help regulate the flow of checks that go through the banking system on a daily basis. This is done by mandating once-a-day distributions of checks. This process of controlled disbursement happens early in the day so that certain investment and fund management goals can be earned.

Conclusion

So now that you know what does loan disbursement mean and how it can differ from reimbursement or a payment, you are one step closer to being a small business owner.

Nabeel Ahmad

Nabeel Ahmad

Nabeel Ahmad is the founder and editor-in-chief of Insurance Noon. Apart from Insurance Noon, he is a serial entrepreneur, and has founded multiple successful companies in different industries.

Leave a Reply

Insurance Noon is the world's leading source of insurance related content on the web, focusing on industry news, buying guides, reviews, and much more.