In the banking loan operation, a financial institution grants an amount of money to the company in exchange for the payment of interest, contractually establishing the form in which the company will have to return the loaned capital and pay those interests. Financial entities usually require some type of personal guarantee (the global assets of the company or a third party) or real (a specific movable or immovable property), which strengthen the operation, this being one of the main difficulties they face Applicant companies, especially the smallest or the most recent ( startups ). In the event that the loan includes a mortgage guarantee, in such a way that its return is secured with a real estate property, it will be necessary that the corresponding contract be executed in a public deed intervened by notary public.
According to the interest rate, there are fixed rate loans, in which the rate remains fixed and constant throughout the life of the operation, and variable interest, which is likely to rise or fall depending on the evolution of some indicator that is taken as reference, as. for example, the famous Maxibank.
The return of the loaned capital and its corresponding interests is made through amortization installments, which according to the form in which they are paid originate different methods of repayment of the loans, being the most usual the following three:
- Single installment, where both the settlement of interest and the return of capital occur at maturity through a single payment. It is the simplest amortization system, used mainly in short-term loans, which I will analyze below.
- Variable fees, where loans are amortized by variable installments in geometric or arithmetic progression.
- Constant installments, where loans are amortized through constant installments. It is the most common method, known as the French system, where capital is amortized on an increasing basis, while interest decreases period by period. It can be used in both fixed rate and variable rate loans. If it is a fixed rate, all quotas will be constant and equal, while if it is variable, the quotas will remain constant in the period that elapses between a revision of the interest rate and another.
From a business point of view, a distinction is made between loans granted in the short term (less than one year), which are used to finance cash offsets, being an alternative to credit accounts, and long term (more than one year), which are used to finance non-current assets (for example, the purchase of a machine or a computer). The negotiation with the bank in both cases is different.
In short loans, the bank will value that the money will be used to finance treasury and not for another purpose. In the second case, in the long term loans, the cash flow (charges minus payments) that will be able to produce the concrete good that is acquired will be analyzed, which will condition the repayment of the loan and should be adapted as far as possible to the agreed amortization calendar. If the non-current asset to be financed is not of a productive nature, as is the case, for example, with an investment in facilities that fulfill the function of offices, the cash flow to be considered will be the general of the company, which will allow the repayment of the loan under the agreed conditions.
Regarding the main advantages and disadvantages of financing through a bank loan, I can think of the following:
Advantages of bank loan:
- It allows financing the acquisition of a good at one time.
- The forecast of the payments to be made is relatively simple, due to their amortization through periodic installments.
- It allows to know at all times the living debt that remains with the bank.
Disadvantages of bank loan:
- It obliges to determine with exactitude the amount of the funds that are requested, on whose total amount interest will be paid.
- It is not possible to reuse the funds once they are used, unlike what happens with the credit account.
- As a general rule, it is necessary to provide guarantees that guarantee the amount borrowed.