What are the differences between credit and loan?

on July 28, 2021

Throughout their life, most SMEs need to resort to external investment, either to start the business, make it grow or finance working capital. Choosing the correct financing modality can make the difference between the success or failure of a business .

Commercial credit is the financial instrument most used by Spanish SMEs, followed by lines of credit and bank loans, options used by 28.2 and 20.6% of companies, according to the report on the financing of the 2018 SME . Knowing the differences between credit and loan will allow you to choose the most appropriate instrument for your business model . fashionglee

What is a credit?

The credit or line of credit is a contract between a credit institution and the company, through which a certain amount of money is transferred during a set period of time . The credit institution, which is usually a bank, makes a certain amount available to the company, so that it decides how much it needs and at what time, having flexibility when it comes to returning the amounts used, which are available again until end the credit period. tophealthfitnesstips

What is a loan?

A loan is a financial operation in which an entity, generally a bank, grants a fixed amount of money to the company, which it must repay within a specified time limit . The company signs a contract in which the interest to be paid and the details for the return of the installments are indicated, which are usually regular, either monthly, quarterly, semi-annually or annually.

Main differences between credit and loan

Degree of flexibility. Credit is a more flexible financial instrument than loans, since the SME will be able to have the money when it needs it, within the period of time established in the contract. The repayment conditions are also usually more comfortable , they are not as rigid as the installments and terms that the loans impose.

Interest payment. As a general rule, lines of credit tend to have higher interest rates than loans , but you should bear in mind that you will only pay for the amount you actually use , not for all of the money, although in some cases a small commission may be charged. on the balance that has not been used. In the case of loans, interest is applied from the first moment on the total amount received . superhealthiness

Possibility of postponements. Another difference between credit and loan refers to deferrals. If you have requested a loan, when you have amortized all the capital through the payment of the installments, the operation will be concluded, without the possibility of accessing more money, unless you request another loan. In fact, requesting a loan deferral often involves renegotiating the original terms of the contract , so you are likely to end up paying higher interest. If you have applied for a line of credit, it is more likely that you can renew it every year or that you can expand it.

Purpose The destination of the capital is usually another difference between credit and loan. Credit lines are often used as a financial cushion, to which to turn when you face a lack of liquidity due to late payments from clients, to finance working capital. Loans, on the contrary, are often used to finance larger activities, such as a warehouse expansion or an internationalization process . redditbooks

Need for guarantees. Given that loans are used to cover greater needs of SMEs and the self-employed, these are usually higher amounts than those granted by loans, so it is also more likely that banks request guarantees and guarantees that reduce the risk of the loan. operation. Consider that providing this documentation also usually represents an additional cost that will be borne by the company.