It is relatively usual to listen to people use the financial terms credit and loan interchangeably, despite being a concept that presents relevant differences. Due to the importance of knowing in detail what these financial instruments consist of, in this post we are going to specify the main characteristics of the business loans and the credits for companies, as well as the differences between the two.
What are business loans?
The business loans They are financial operations in which two parties are involved: the lender and the borrowing company. The borrowing entity grants a certain amount of money to the borrowing business (principal of the loan). In return, said borrower agrees to repay funds that have been granted to the lender within a certain period of time. In addition to the repayment of the principal of the loan, must be pay also some interests calculated on the principal.
Within the loans, Borrowers receive all of the money that is the object of the operation at the time it is signed. On the other hand, the amortization of loaneither, that is, the return of the money lent plus the payment of interest, is made in periodic terms agreed by the parties.
It is common for companies to resort to loans when they have the need to undertake large investments, or in cases in which they are going to provide a service other than regular activity of the company That said, each specific case requires the appropriate choice of the following loan variables:
- Amount of the investment that will be financed with the loan.
- Interest rate of the operation.
- Loan term.
Within loans, the use of online loans. Online loans have the same procedure as traditional ones, but with the particularity that they are made taking advantage of a tool as useful as the Internet.
What is a business loan?
He business credit, on the other hand, is a financial operation by virtue of which a applicant company has the possibility of accessing a maximum amount of money offered by a credit institution. You will have the option of accessing this amount during the period of time agreed between the parties involved.
With credits, businesses can face unforeseen events or lack of resources in the short term, making use of available credit money in the amount they need. For this reason, it can be affirmed that the credits are characterized by the availability of money and its flexibility.
As in the case of loans, the online credits they are on the rise Thanks to the online platforms, the associated processes are simplified, fewer requirements are requested for its concession and the entire operation can be executed with greater agility.
What is the difference between both?
It is of great importance to know the differences between credits and business loans, since the decision between one financial figure or another can be transcendental for the progress of business. As Main differences we highlight the following:
- Availability of the money granted: In the case of loans, the borrowers receive the entire capital at the time the operation takes place. However, in credit operations, applicants can make use of the amounts of money they consider necessary at the time (never exceeding the maximum amount of the credit).
- Expiration: Within the contracts of a loan, the beginning and end of the same are agreed, so in case of needing additional funds once the loan has expired, a new one must be requested. In the credits, once the term expires, it can be updated automatically.
- purpose of money: The funds obtained with the loans usually have the purpose of financing investments that require significant amounts of money such as the purchase of machinery or new commercial premises. The credit, due to its characteristics, is usually used to finance the needs of working capital (short term).
- Interests: In a credit there are two types of interest, those that are paid for the amount of money available (total credit) and those that are paid for the part of the credit that has actually been used. In loans, interest is calculated based on the principal of the loan.
How each company finances its capital needs to undertake investments can affect, on many occasions, its operation and survival. Hence the imperative obligation to know what the credits and loans for companies, and to know what are the differences between these two financial operations.
In addition, at Alter Finance we are specialists in business financial advice. If you need help choosing the most appropriate source of financing for your business, contact us without obligation.