This article is part of our investment series and is intended to explain the operation of professional credit.
How professional credit works
Banks offer business loans to finance investments in tangible assets, as well as investments in intangible assets (business, brand, license).
The term of the loan is generally determined by the depreciation period of the financed property.
The amount of the loan will depend on the type of property and the financial situation of the company, and will reach 100% of the value of the HT good. In any case, the company will have to pay the VAT advance.
If your loan concerns a business start-up, the bank will most likely require collateral and the amount contributed by the shareholders will affect the borrowing capacity of the company because the bank will ensure that the risks associated with the creation are shared. between the different contributors of capital.
Purchase of a professional vehicle
Your bank can offer you a loan to finance the purchase of a professional vehicle. The duration of this type of loan is usually 3 to 5 years.
It will be necessary to compare the cost of this solution with the other existing options to finance this type of purchase: leasing and long-term leasing.
Purchase of equipment
Equipment purchases can be financed with a conventional bank loan. The loan term will depend mainly on the type of equipment.
Here again the cost of this solution will be compared with the cost of a lease.
Professional real estate loan
Professional real estate loans are loans granted over a long period (8 to 15 years) to finance the purchase of a professional property.
The bank will ask for a guarantee on the financed property (lien registration of money, mortgage).
Purchase of intangible items
Banks generally offer credit to help finance the purchase of intangible assets. The duration of the loan varies according to the type of property purchased: share buyback, goodwill, license or trademark.
The different modes of repayment of professional bank loans
There are 3 different repayment modes:
The constant annuity
Constant annuity is the most common form of repayment. Its very simple: you pay each month or each quarter an amount fixed in advance.
The amount of the constant annuity covers both the repayment of principal and the payment of interest.
The advantage of this method of repayment is that the amount does not change which facilitates the development of your cash forecast. On the other hand, the portion of the capital repaid by the first annuities is often small, which makes the loan a little more expensive than a depreciable loan, for example.
The depreciable loan
When the loan is repayable, you pay each month or each quarter a fixed amount to repay the principal and interest calculated on the amount of capital remaining due.
With this formula, the interest expense, and therefore the total amount of your annuity, decreases as you repay capital.
The loan in fine
The loan in fine is a loan repayable at maturity. That is to say that during the life of the loan you only pay the interest, then once in maturity you repay the entire capital at one time.
In practice, the bank will generally ask you to put in parallel (often on life insurance) to sum allowing you to repay the principal at maturity. This investment also serves as collateral for the loan agreement.
The interest rate
Banks generally leave you a certain leeway with regard to the type of interest rate on the professional credit they grant you.
So you will probably have to choose between:
- a fixed rate: rate varying over the duration of the loan
- a variable rate: rate indexed on a base index
- an adjustable rate: rate indexed on a base index with a ceiling protecting you from a sharp rise in interest rates
The advantage of the fixed rate is that you know exactly how much you will pay in advance. However, depending on the evolution of interest rates, this option can be very expensive (if the rates drop sharply after the contract is signed) or very advantageous (if the rates go up).
On the other hand, a variable rate allows you to benefit from a fall in rates occurring after the setting up of bank credit, but leaves you in return exposed to a sudden rise in interest rates.
The adjustable rate meanwhile allows you to benefit from lower rates while limiting your exposure to higher.
My advice is to rate them as low as they are low or their downside is limited, and for reviewable when you think that rates have the potential to fall sharply. If your credit concerns a small amount or a very short period (1 to 2 years), opt for a fixed rate because the potential gain linked to a lower rate will surely be limited.
Insurance and guarantees
Depending on the financial situation of your company, the bank may require that you take certain insurance and that you bring a number of guarantees or a personal guarantee.