Loan and credit – what you should know before applying for financing

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Loans and credit are two different contracts under civil law, but they are almost synonymous in general circulation. Are entrepreneurs actually similar to each other?

Loans and credit are two different contracts under civil law, but they are almost synonymous in general circulation. Are entrepreneurs actually similar to each other?

In colloquial language (in the case of loans and mortgage-backed loans), a mortgage is associated with a loan for the purchase of real estate, while the mortgage can be used for any purpose.

Loan and credit – common features

Loan and credit - common features

Both loan and credit are contracts. Thus, they can be concluded only with the consent of both parties, one of which undertakes to transfer (borrow) funds for a specified period of time, and the other to accept them and return them after a specified period. Both in the case of loans and borrowings, the party borrowing money may request remuneration for the temporary provision of funds, and collateral for repayment by the creditor. It can be said that every loan meets the conditions to be defined as a loan. In practice, the principle of freedom of contract also allows the loan to be shaped as a contract almost identical to a loan.

Loan and credit – formal differences

Before you sign the contractLoan and credit - formal differences

Under banking law, only a bank can grant a loan. The name “loan” was simply reserved for large, specialized enterprises that meet the conditions to be called a bank.
When reviewing codes and laws, we will also find several other differences between a loan and a loan.

  • The loan is always a paid contract, with remuneration for the lender. There are, however, loans with a 0% margin and free of charge. They are provided by banks associated with structural funds or state aid programs, and the lack of fees is a form of financing. Theoretically, a loan can be a free contract.
  • The loan agreement must be concluded (under pain of nullity) in writing. It can be sent and confirmed by electronic means, but it still needs to be saved and clarified. Theoretically, the loan does not require any particular form of contract conclusion.
  • The loan is always granted in the form of a transfer. Not always to the borrower’s account, sometimes only virtual, but always a transfer. Theoretically, the loan can be given in cash or even the equivalent amount in a good.
  • The loan is granted for a specific purpose. So we have an investment and mortgage loan for the purchase of a car or machinery and … consumer loan. Which, despite the original assumption, has no specific purpose. All in all, a corporate overdrive has no specific purpose. Theoretically, the loan does not have to have any purpose.
  • Before granting a loan, the bank always checks the creditworthiness of the borrower, especially the enterprise. In theory, the lender does not have to do this.
  • The ownership of money in the case of a loan does not transfer to the borrower, while in the case of a loan, both the money (as well as other things that can be the subject of the loan) become the property of the borrower.

Before you apply for funding

Before you apply for funding

Banking (loans) and non-banking (loans) products are similar in so many ways that it is always worth making a comparison between them when looking for financing for an enterprise. Loans similar to loans are granted by non-bank companies, investment funds, business angels, state institutions and European funds. It may turn out that the product best suited to your company’s needs has an institution other than the bank that holds the company’s current account.

Banks are usually companies of a much larger scale than their competitors without this name. On the one hand, therefore, they have developed procedures, on the other, they are less flexible and reluctant to enter into contracts outside their template.

Before applying for financing, therefore, prepare a detailed plan in which you will specify what funds you will spend, how much you need them, when you need to make a deposit and at what time you will be able to return the borrowed amount. It is best to write it all down and contact several competing companies, including banks. Ask to send an offer by e-mail or help from an adviser and compare offers with each other. Always take into account that you may get the proverbial “roll up leg” and, for example, the investment will pay off later than initially assumed. Once you assess the risk and costs, you will consciously decide whether you prefer a bank loan or a loan from a non-bank institution.

Before you sign the contract

Before you sign the contract

Checking the contract and financial conditions is extremely important for both bank loans and non-bank loans. What to pay special attention to ?:

  • Interest and other fees related to financing – it often happens that loans advertising the slogan “No interest”, “0% commission” are in fact more expensive because the borrower has to bear other hidden financing costs;
  • In the case of loans secured by a mortgage, particular attention should be paid to whether it is actually a mortgage loan or a contract with the so-called expropriation, where the borrower transfers ownership of the property to a loan company;
  • The option of extending the contract is extremely important if the loan is to be repaid from the company’s profits. Often, we are not able to predict whether our business project will be implemented and monetized in the planned time.

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