Business loans as a source of their financing

Business loans as a source of their financing. Every business needs a source of financing. The basic source is of course the initial capital, but very often companies use foreign capital, thanks to which they can finance not only current operations, but also investments. One of the financing options is to take out a business loan.

Lack of financial liquidity

Every month, companies earn income, but also incur high costs of doing business. The costs of renting office space, storage space, electricity, water, employee salaries and overheads are just examples of fixed costs that the company has to pay each month. If we add obligatory monthly taxes to it, a really large amount will be collected. Of course, the costs should be covered by sales revenues, but companies often face the problem of financial liquidity. It often results from the mismatch between the payment dates of sales invoices and the payment dates that the company must make. In such a situation, the company has two options to choose from: either adjust the terms of payment of contractors to its expenses or incur liabilities. The first solution seems to be the simplest, however, in the age of great competition on the market, the customer may terminate the contract and choose a supplier who will adjust the payment date to him. So there remains a second solution. There are several ways to finance enterprises on the financial market, of which loans for companies are one of them.

Loan and credit

A loan is often equated with a loan, while the differences between them are considerable. The loan is granted by a bank, the loan may be granted by another institution as well as a private person. Loan terms are imposed by the lending bank, while loan terms can either be imposed or negotiated in advance. When signing a loan agreement, we will most often be forced to pay tax on civil law transactions. Meanwhile, the loan agreement is free of this fee. Banks have a wide range of loans for entrepreneurs, while entrepreneurs are more and more willing to reach for various types of loans for companies.

Why? First of all, because in order to get a loan, you usually have to meet many conditions set by the bank, and the whole procedure is long. The company must take into account that it will have to present financial statements from previous years and a detailed business plan for the implementation of the planned project. This is another distinguishing feature of a loan – it is taken for a specific purpose, so it cannot finance, for example, employee salaries or pay taxes, although there are also exceptions to this rule. Lenders are much more flexible. Of course, they may require the company to provide the purpose of the loan or present the financial situation, but often the whole procedure is much less complicated than in the case of a loan. In addition, the loan can be used for various purposes; it does not have to finance investments directly, but also serves to maintain financial liquidity.

Types of commercial loans

Business loans are divided into long-term and short-term loans. The conditions for granting them depend on the loan amount, repayment period or other requirements set by the lender. It should be remembered that the more reliable the lender, the worse the conditions he can place. That is why companies often decide to take out non-bank loans, because banks (which apart from loans also grant loans) often impose strict conditions, similar to the terms of the loan. Additionally, banks offer loans in lower amounts than other institutions. A loan for the company can be obtained from so-called parabanks, which usually offer a much shorter repayment period, but also higher installments. In return, they do not require companies to document their repayment ability.

Government and eu loans

The company can also apply for a loan from public funds, from the government, local governments or from EU funds. These loans are usually intended for a specific investment, which is usually also socially beneficial, for example by reducing unemployment or building an infrastructure that everyone can use. This does not mean, however, that the company cannot make money on such an investment. On the contrary – no entrepreneur will undertake an investment that will not bring financial benefits. The loan is characterized by a low interest rate, and under certain conditions, it may even be non-refundable. However, in order to receive it, you must complete the formalities and show that it will be used properly. So they are not loans, which can be used to finance the current activity due to the lack of financial liquidity. Unfortunately, due to the very favorable conditions, obtaining it is not as easy as loans from commercial companies.

The variety of sources of financing for modern enterprises means that corporate loans are not as popular as they used to be, nevertheless, many of them are still financed with borrowed capital. When choosing a loan offer, you should pay attention to many aspects that make the loan more attractive than other forms of business financing.