Although it sounds very similar, loans and credits are two totally different things that have nothing to do with each other. To give us an idea, both loans and credits are an obligation to return money along with their commissions and interests to the financial entity that has lent it to us in an agreed period. In this post we will learn what the differences between each are and what role they play in financing for companies.
Loans VS. Credits
A loan is a financial operation in which a lender, be it an entity or person, gives a borrower a fixed monetary amount at the beginning of the operation. The latter will have the condition of returning that amount together with the agreed interests within a certain term. The loan settlement is usually made through regular installments (monthly, quarterly, semi-annual …) throughout that period. Therefore, the operation has a previously determined existence. Interest is collected on the total amount borrowed.
Normally, loans are granted to finance medium or long-term operations, in order to acquire a good or service: purchase of a home, a vehicle, a business premises, to carry out the studies. Personal guarantees are usually required, such as a guarantee or real guarantees, such as a mortgage or a good. Within the modality of loans, we could find personal and mortgage loans, being personal loans, the usual ones for goods of not very high amount, while mortgage loans are usually destined for the purchase of houses.
On the other hand, a credit is a fixed amount that banks make available to the client, its settlement period is usually short but interest is usually high. This amount is not delivered to the customer at the beginning of the operation, but will be used according to specific needs, using an account or a credit card. In other words, the entity will make partial deliveries at the request of the client. In addition they usually give us the alternative to pay the total debt or to make it in minimum installments. That is why they are usually called revolving or revolving credits, since the credit is renewed again each time the debt is totally or partially canceled and the money becomes available again.
The credits are also made during a certain period, but unlike loans, when it ends it can be renewed or extended. The interest on loans is usually higher than on a loan, but as we have said, you only pay for the amount used.
“The credits are more suitable to collect the mismatches between collections and payments of the companies”
Loans are usually given to finance the purchase of a good or service: a car, studies, renovations in your home, etc. The credits are used to cover mismatches between collections and payments and to cope with times of lack of liquidity.
That is one of the main reasons why loans are more suitable for companies usually more than for people in particular. That is why we should acquire a loan for products that we know the price and a credit when we have the need to obtain liquidity, but it is not known precisely when or how much it will be needed.
Advantages and disadvantages of loans and credits
Advantages of the loans
- We find less interest than credits.
- It allows higher amounts of financing.
- You can ask for fast personal loans (refraining from justifying the purpose of the loan).
- The amount to be finally paid from the beginning of the operation is known.
Disadvantages of loans
- Renewal of the loan at maturity is not allowed (we should make a new loan contract).
- High management expenses.
- Complicated processing.
- Little flexibility against credit.
- Depending on market indices there are different interest rates.
- High fees for early settlement (on fixed rate personal loans).
- Whenever necessary and as many times as you need you can renew and extend the credit.
- Useful for disposing of the amount in cases of emergency.
- Allows expedite business operations.
- More flexibility
Disadvantages of credits
- We find more interests than in the loan.
- Unlike the loan, the repayment period is shorter.
- Higher processing costs and expenses.
- More financial burden if payments are not met. Customer history may be damaged if there is a delay in payment.
Most banks shut down the credit tap for companies once the well-known economic recession began and it was quite impossible to get a loan for your company, especially for SMEs. Even so, once the economic situation improved and the measures of the Central Bank were approved along with the emergence of new competitors, our banks returned to lend credit to entrepreneurs.
The granting of loans for companies, whether large or small, has increased greatly in the last year according to data from the Bank as well as the main financial entities of our country. This fact has joined the emergence of fintech, the price of business loans experienced a continued decline throughout 2015, and keeping legal interest rates at record lows.
The arrival of the fintech sector has made it easier for many companies and online platforms to offer loans to companies with good financing conditions and with faster and more convenient procedures than banks. That is, if we want to get financing beyond banks, these are the financing options for companies:
1- Online credits for companies
As we mentioned before, companies that offer online loans have proliferated. In addition, it seems that all are advantages over banks as they are more flexible and with shorter concessions than banks, for a maximum of 24 hours.
2- Crowdlending platforms
Also known as P2P or P2B loan platforms. These companies connect companies that need liquidity with investors who are willing to lend it to achieve profitability. Although the requirements to get a P2P credit are more flexible than with banks but the price will be higher if the companies are risky to lend us the money.
3- Loans with mortgage guarantee
If the company is going through a delicate situation and cannot prove its solvency or that of its company in front of P2P companies or online credit platforms, they can still request financing. Normally these last two ask for it as a necessary requirement to access financing, but the solution is home equity loans. These can grant up to 30% or 40% of the value of a property placed as collateral in 48 hours even if the employer has outstanding debts or is on a list of delinquents.
Loans for companies
On the other hand we find that we can access loans for companies targeting SMEs and companies. These loans can help us with the specific expenses of the business such as the acquisition of machinery, computer equipment or furniture, as well as to cover payments to the Treasury or any specific need to obtain liquidity.
It is very strange that the interest rate of these loans is lower than 10.00% and we can find fixed and / or variable. Currently there are many entities that do not publish the specific interest rate on their product sheets and only inform us that the interest may be different depending on the profile of the applicant and the conditions that are negotiated.
The repayment term can reach up to 15 years and the amount financed up to 75,000 dollars, an amount certainly higher than other loans and personal loans. The conditions of loans for freelancers are very flexible and vary according to the needs and profile of the client.
When applying for one of these loans for freelancers it is convenient to assess the following aspects:
- Asking for short-term loans will help you avoid overdrafts by covering specific liquidity needs.
- They respond more to the obvious needs of the collective than to look for only specific financial products for freelancers.
- It is recommended that before requesting the credit make an exhaustive business plan taking into account the payments to be made. For this it is better to create a repayment table where interest and capital to be paid during the life of the loan are broken down.
- We will benefit more from requesting a loan from more than one financing entity to fully understand the conditions that we can find in other banks.