What Does Loan Disbursement Mean?

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 is approved, the loan is ready for disbursement. Users with the “Set Disbursement Conditions” permission can add or change disbursement details on inactive loan accounts, allowing them to define these details when posting the loan application. Users without this permission cannot change disbursement details but can still post the disbursement on the account.

Disbursement details affected by this permission include:

• Disbursement fees.
• Channel type and its fields.
• Anticipated disbursement date.
• First repayment date.

Before disbursing the loan, users can view the disbursement details in the “Disbursement Details” section on the account overview until activation. Users can change these details after creating the account, and the system keeps a full audit trail of any modifications.

Loan disbursements can be positive or negative. A positive disbursement credits an account, while a negative disbursement debits it. For example, a negative disbursement occurs when funds are withdrawn from a student’s account due to overpaid financial aid.

In the context of student loans, disbursement involves paying out the loan proceeds to the student borrower. The school and loan servicers notify students in writing about the loan amount and expected disbursement dates. Federal and private student loans are usually disbursed multiple times throughout the school year.

The school’s financial aid office receives funds directly from federal and private lenders. Once the office disburses these funds, students can use them to cover tuition, fees, and living expenses, which appear as credits on their student accounts. Any remaining funds are sent to the student via check or direct deposit. Check with your school to confirm the disbursement method.

For students in work-study programs, disbursements come directly via direct deposit or check, though they can request the school to apply these funds to their account.

Students can cancel a loan or grant up to 120 days after disbursement without incurring fees or interest. However, they must cover outstanding tuition and fees out of pocket or secure alternative funding. Completing the FAFSA is essential to receive student loan disbursements, setting you on the path 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

Now that you understand the meaning of loan disbursement and how it differs from reimbursement or a payment, you’re one step closer to becoming a small business owner. By grasping these financial concepts, you can navigate the funding landscape with greater confidence.