> For the complete documentation index, see [llms.txt](https://docs.trilobyte.finance/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.trilobyte.finance/overview/how-a-loan-works.md).

# How a Loan Works

A Trilobyte loan follows a structured lifecycle from creation to settlement. Here's how a typical loan flows through the protocol.

## Step-by-Step

### 1. Vault Creation

A **Pool Manager** evaluates a business's creditworthiness and negotiates loan terms off-chain. Once agreed, the manager creates a vault via the **Factory** contract with the following parameters:

* **Principal** — The loan amount (e.g. 100,000 USDC)
* **Interest rate** — Annual rate in basis points (e.g. 1000 = 10%)
* **Loan term** — Duration in months (e.g. 12)
* **Split ratio** — Percentage of each repayment routed to the EMI pool for investors (e.g. 80%)
* **Funding deadline** — Optional deadline for full funding
* **Approval deadline** — Optional deadline for manager approval after funding
* **Grace period** — Window before default can be triggered after a missed payment
* **Permissioned** — Whether only allowlisted investors can participate

The Factory validates all parameters against global settings, checks the manager's collateral and credit limit, and deploys a new Vault smart contract.

### 2. Fundraising

The vault enters the **RaisingFunds** phase. Investors deposit funds and receive **SEP-41 debt tokens** at a 1:1 ratio. A 0.5% protocol fee is deducted from each deposit.

The vault automatically transitions to **AwaitingApproval** once the full principal is raised.

{% hint style="info" %}
If a funding deadline is set and the vault fails to raise the full principal by that date, anyone can call `check_funding_expiry()` to cancel the vault and refund all investors.
{% endhint %}

### 3. Approval & Disbursement

The **Pool Manager** reviews the funded vault and calls `approve_and_disburse`. This:

* Disburses the funded amount to the borrower
* Calculates the EMI (Equated Monthly Instalment)
* Sets the first payment due date (30 days from disbursement)
* Transitions the vault to **Active**

{% hint style="info" %}
If an approval deadline is set and the manager fails to approve by that date, anyone can call `check_approval_expiry()` to cancel the vault and refund investors.
{% endhint %}

### 4. Repayments

The **Borrower** makes periodic repayments. Each payment is processed as follows:

1. The payment is **split** by the `split_ratio`:
   * **EMI pool** — Investor yield (e.g. 80%)
   * **Cash pool** — Borrower operating capital (e.g. 20%)
2. The 0.5% protocol fee is taken from the **cash share** (never the EMI/investor share) and sent to the treasury
3. The outstanding principal is amortised
4. The next due date is set; the loan completes once the **outstanding balance reaches zero**

### 5. Yield Distribution

**Investors** can call `claim_yield` at any time during the Active or FullyRepaid phases to claim their pro-rata share of the EMI pool. An investor's share is proportional to their debt token balance relative to the total supply.

$$
\text{claimable} = \frac{\text{balance}}{\text{total\_supply}} \times \text{emi\_pool} - \text{already\_claimed}
$$

### 6. Settlement

When all payments are made, the vault transitions to **FullyRepaid**. The manager's collateral is released. Once all investors have claimed their yield and the borrower has withdrawn remaining cash, the vault can be finalised — transitioning to the terminal **Finalized** state.

## Visual Overview

```
Pool Manager creates vault
         │
         ▼
    ┌─────────────┐
    │ RaisingFunds │ ◄── Investors deposit
    └──────┬──────┘
           │ fully funded
           ▼
   ┌───────────────┐
   │AwaitingApproval│ ◄── Manager reviews
   └───────┬───────┘
           │ approve & disburse
           ▼
      ┌────────┐
      │ Active │ ◄── Borrower makes payments
      └───┬────┘     Investors claim yield
          │
    ┌─────┴──────┐
    │            │
    ▼            ▼
┌──────────┐ ┌───────────┐
│FullyRepaid│ │ Defaulted │
└────┬─────┘ └───────────┘
     │
     ▼
 ┌──────────┐
 │ Finalized │
 └──────────┘
```