Conducting classes with young entrepreneurs I realized that for many a loan, loan or overdraft limit means the same thing, i.e. money from a bank. Is this really the case in practice? Unfortunately not.
A similar attitude is presented by many entrepreneurs whom I meet every day in my professional practice. It has already become a standard that it does not matter for the client in what form it will receive financing. Unfortunately, here I have bad news, the form of financing is important not only for the bank, but for the financial risk of the entrepreneur!
So what is the difference between a loan and a loan, and what is an overdraft? Each of these forms of financing is the acquisition of foreign capital that increases the development opportunities of the enterprise. However, how to choose the right product for the optimal development? I will explain the difference below.
is a form of financing the company’s current operations. Funds from this source of financing should be allocated to the purchase of goods, raw materials, materials and services necessary for the borrower’s current operations. It can therefore be assumed that funds from this source finance the variable costs of the company’s operations, i.e. costs directly correlated with the volume of sales. The basis for determining the level of such a loan is the amount of income generated by the company, and this whole mechanism is called by the economists financial leverage. The contract is usually concluded for a period of 12 months, which is a short-term commitment.
An overdraft facility is used to increase sales, which is why it should not be used to finance anything other than the purchase of goods, raw materials, materials or services necessary for current operations. Money from this source is working capital, and its depletion reduces the company’s productivity and can lead to a loss of liquidity! However, this determines the bankruptcy of the enterprise!
is a form of external investment financing. It is characterized by a strictly defined purpose for which funds obtained in the form of credit will be allocated. In connection with the above, we finance the purchase of fixed assets with an investment loan. It is very common practice that the purpose of the loan is to secure the loan, but this is not the rule. Nevertheless, to get a good offer, it’s worth thinking about security. It gives the possibility of obtaining a higher amount (unlimited threshold for unsecured loans), a lower margin, longer repayment period, negotiating commissions and other terms of the agreement, such as grace period for repayment of capital. Creditworthiness is determined on the basis of profits generated by the enterprise, which determine the entrepreneur’s ability to service the debt. The loan period, depending on the type of investment and the form of collateral, can last from several to even several years and is a long-term commitment of the company.
Funds from the loan should be used for the purpose of lending indicated in the contract! Using them contrary to their intended purpose constitutes a violation of the terms of the loan agreement, and as a consequence, pursuant to art. 75 of the Banking Act, is the basis for its termination and return of funds paid within the prescribed period! If this does not happen, the bank has the right (and uses it) to forward relevant information to credit information registers, which will hinder or even prevent other financing from being received in the future!
is a term associated mainly with the cash loan market, because its characteristic feature is the lack of definition of the financing goal. Therefore, funds from this source can be used both for direct increase of sales volume, but also for investments. Compared to credit, it is more expensive but more easily available. The amount of loan possible to obtain is determined by the bank on the basis of current income, the level of which, as in the case of credit, determines the enterprise’s ability to service debt. Often, banks also pay attention to the level of revenues, while due to the recommendations of the Polish Financial Supervision Authority, they depart from calculating capacity using the income method. In the case of a loan, it is rather unsecured, which is why the period of its granting is unlikely to exceed 120 months, and often it is only 60. Nevertheless, the ease of obtaining it is the greatest, that’s why often entrepreneurs immediately decide on such a solution.
A loan is the fastest way to receive capital, but remember that it is also the most expensive. That is why it is worth to go to a specialist who will prepare the entire engineering of financing the venture in case of bigger expenditure. Credit specialists have the knowledge and tools to choose the most optimal financing structure, which often determines the success of the investment.
Entrepreneur, if you are interested in increasing the level of sales and need funds for the purchase of goods, raw materials, materials or services necessary in current operations, think about the overdraft line. If you are interested in buying a property, production line or a single machine, or even a car, ask for a loan. If you want to increase sales, but the available credit limit is too low, or you want to invest in promotion, acquisition of new customers or purchase of intangible assets, or you want to quickly raise funds for a small investment, then ask for a loan offer.