A bank loan is a method of external financing that allows an individual or a company to obtain a loan from a banking institution. This loan is granted after a careful study of the risk that the project represents for the bank. In addition, while some loans are granted at zero interest, particularly certain real estate loans, the vast majority of loans are subject to an interest rate.
Why use a bank loan to finance your business?
The interest in resorting to a bank loan is threefold. On the one hand, it allows the project leader or the business manager to finance a project for which he does not have sufficient funds . It is precisely the profits generated by the company that will finance the loan instalments as and when. Thus, the bank loan makes it possible to launch a project and make more or less significant investments.
In addition, it can be useful to avoid investing all of your personal savings . Indeed, even if most of the time the establishments require a personal contribution of between 10 and 30% of the amount of the project depending on the case, it can be useful to keep some savings aside after the implementation of the project, especially in case of unforeseen circumstances.
The same applies to a company that has already been created; resorting to a bank loan prevents it from affecing its cash flow and significantly reducing its self-financing capacity (CAF).
On the other hand, using a bank loan to finance your business allows you to deduct part of the interest from the taxable income , and thus reduce the calculation base on profits.
⚠️ Please note : taking out a bank loan for your business is a commitment in the same way as a personal property loan. You agree to repay the amount loaned, as well as the interest. In the event of default, the bank may sue you for payment.
an investment, i.e. the purchase of durable goods such as machinery and equipment, vehicles, computer equipment, etc.;
However, it is often more difficult to get approval for a cash loan, which is why this type of loan is usually granted for a short term and at relatively high interest rates.
The amount of the bank loan
The amount of bank loan that can be granted to you for your business depends on several factors suchas:
⚠️ Warning : do not minimize the amount of the loan you need. This is a common mistake among project leaders. However, if you do not correctly estimate your financing needs, you may have to apply for a new loan later. This can be more complicated and endanger the financial health of the company.
The interest rate charged for a bank loan granted to a company depends on the bank’s policy, but also on the usury rate, the type of loan and its duration. Generally, long-term loans (5-7 years) have a lower interest rate than short-term loans.
The duration
The duration of a bank loan for a business can range from a few months to several years. Apart from real estate projects, the duration of loans rarely exceeds 7 or 10 years. The duration of the loan is determined according to the property to be financed and its amortization period.
Guarantees
The bank may request certain guarantees to cover the risk of non-payment. There are different types of guarantees which can be more or less expensive:
the mortgage;
the pledge ;
the pledge;
the privilege of lender of money;
personal joint and several surety.
Reimbursement terms
Finally, the bank loan contract must provide for the repayment terms. This mainly concerns the frequency of repayments (monthly, quarterly or annually), the amount of the installments and their distribution between capital and interest. For this, an amortization table is used .
