What are the differences between credit and loans for businesses?

What is a business loan?

A loan is a financial product that designates a financial transaction. In concrete terms, a financial structure or an individual lends a fixed amount of money to an individual or a company. 

Prior to the transaction, both parties agree on the amount of the loan. The beneficiary borrows money and undertakes to repay the entire amount borrowed .

In the case of the loan, the amount of money granted is real. After signing, the money is transferred to the borrower's bank account . The money is available to be spent. 

For a certain period of time, the borrower is in debt, because he has to pay back his loan with interest. This interest is calculated on the basis of an interest rate, defined in the loan contract. 

What is a business credit?

Like a loan, credit can only be granted by a financial structure such as a bank. The amount of the creditis again fixed by an agreement between the two parties: the lender and the borrower.

In short, you can take out credit with a bank, but you cannot take out credit with an individual, such as a family member. 

Unlike a loan, the amount credited is not physically available in theborrower 's bank account . Instead, the borrowed money is accessible through credit card withdrawals. The borrower must therefore open a new bank account.

The credit period is not fixed. If the borrower does not specifically request the termination of the credit, it will be renewed at each term.

In this case, this financial product is called an open line of credit. The interest rates vary according to different factors such as the amount or the repayment period of the credit.

What are the advantages and disadvantages of a business credit and loan?

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The benefits of a credit and loan for businesses 

The loan and the credit allow the company to obtain cash. This allows the company to buy equipment, real estate, to buy a business or to finance its acquisition strategies. 

A manager who has taken out a bank loan for his company cannot be excluded from the decision-making power of the structure. Moreover, the company has a possibility of tax deduction of the interests for the bank credits.

The disadvantages of a credit and a bank loan for companies 

The disadvantages of revolving credit

First of all, in the case of revolving credit, there is a high risk of overindebtedness. Indeed, as highlighted in the table, you have to explicitly close your credit line to stop receiving credits. Many companies keep their credit lines open by forgetfulness which can lead to large unwanted debts.

In addition, revolving credit often leads borrowers to take on excessive debt, ignoring their ability to repay. The credits require a guarantee or a guarantee. If the monthly payments and interest are not repaid, the creditor can seize the mortgaged furniture or the guarantee in case of insolvency of the company.

The disadvantages of credit and bank loans 

In the case of loans and credit, the interest rates are high and can generate a budget imbalance and possibly a bankruptcy filing if the company does not become financially stable.

In both cases, it is difficult to access cash if the company is going through a bad financial period. Also, young start-ups do not always have the necessary revenues to reassure the bank. 

A loan can be granted by a private individual which makes the conditions of borrowing easier than in a financial structure where the steps are often longer and more complex.

Finally, both loans and credits are dependent on the macro-economic trends of the country in which they are offered. In this case, as we all know, 2023 announces a macro-economic upheaval of some importance, pushing loans and credits towards their usury rate. A situation that does not seem to go well with the use of bank loans and/or credits.

How do I take out a credit or loan for business? 

Putting together a financing file

In both cases, credit or loan, a company must prepare a financing file.

At the beginning of the file, it is relevant to write a summary of the financing project to facilitate the banker's understanding. 

A table of contents is useful to provide an overview of the file's contents. The file must be readable and neat. The better the file, the more the banker will want to go along with you. 

Attach the necessary documents to the file

It is essential that your file is complete when you send it to your banker. The documents requested are numerous: copy of the identity card of the manager and the main shareholders, proof of residence, Kbis of less than three months of the company, updated statutes, UBO... 

Add supporting documents in appendix

To build confidence, feel free to add supporting documentation as an attachment. 

This includes providing financial documents such as

•  your loan repayments,
• the last three statements of account of the company, 
• the latest VAT returns, 
• the financial situation of the managers,
• and documents related to projects such as the deed of sale or promise to sell when buying a business or shares, order book, estimate for work, pro forma invoice for the acquisition of vehicles ...

Of course this list is not exhaustive.

Have a financing plan

The most important part of your file is the financing plan. Indeed, you must, in the form of a table, expose your needs called "uses" and your finances that is to say your resources. It is important to diversify your sources of financing. 

Loan or credit, what should I choose for my business? 

The loan offers clearer, structured and fixed conditions which is reassuring for a company.

Generally, when an organization takes out a loan, the purpose is to make up for a financial deficit, a lack of liquidity or an immediate need for financing. Conversely, a loan, historically, is granted to increase the purchasing power of a company in the immediate future.

Don't hesitate to look into alternatives to loans or credit for businesses, such as Revenue Based Financing. This new financing method is particularly well-suited to digital companies, enabling them to obtain financing very quickly. 

No need to build a file or convince a banker! To take out an RBF loan, you just need to connect your company's different tools (invoicing, bank accounts...) to allow an algorithm to have a 360° live vision of your company's financial situation. You will get an unbiased answer within 48 hours and the cash will be released in the following days. 

To learn more, please contact us or read our articles on how Revenue Based Financing works. 

A loan and a credit are two financial products that enable a company to borrow money to finance their inventorytheir marketing campaign... A loan is when an individual or a financial organization lends money to an individual/company. A loan can only be granted by a financial institution. In the case of a loan, the money is immediately and physically available in the borrower's account. Conversely, in the case of credit, the money is released gradually. The term of the loan is fixed before the contract is signed by the borrower and the creditor. A loan is recommended for a company because it is a more structured financial tool, with better-defined limits than credit. Another alternative financing solution to loans and credit is Revenue Based Financing.