It is a sum of money paid by a lender to a borrower, the latter agreeing to repay the loan with interest , over a certain period.
Borrowing means going into debt. Do not hesitate to consult the article on the debt ratio or browse our blog to learn more about business invoicing.
A loan is a contract between a lender and a debtor, the latter therefore contracting a financial debt.
What is the loan for?
The operation consists of requesting the provision of a sum of money at a determined rate and for a defined period, for the purchase of consumer products (video equipment, vehicle, etc.), real estate or building up start-up capital for a business.
In the world of small businesses, borrowing is usually contracted with a single bank to cover the financial needs necessary for the activity.
Of course, the more the company generates wealth, the more its debt capacity increases.
There are two main types of borrowing:
the undivided loan which is most commonly contracted by individuals and SMEs.
the bond loan which is an exclusive financing solution for large companies.
The undivided loan
It is a loan made by a single borrower from a single lender, most of the time a banking establishment. amortization: this is the repayment of the borrowed capital alone,
interest: this is the remuneration received by the lender, which the borrower pays in addition to the amortization,
annuity: amount disbursed periodically by the borrower to repay the lender. It therefore corresponds to a portion of the amount borrowed to which is added the interest to be paid to the lender for his service.
There are three formulas for amortization -reimbursement- of the undivided loan:
classic or constant amortization : each month, the borrower repays an identical portion of the capital borrowed, adding interest. Over time, the capital to be repaid decreases, and the amount of interest decreases accordingly, since they are calculated on the capital remaining to be repaid.
This allows the business to generate profit quickly after taking out the loan. The counterpart is that the amount of interest remains high throughout the loan period and that the company will have to be able to repay the capital in one go.
the constant annuity: the borrower pays absolutely identical monthly installments from the beginning to the end of the period. Indeed, the calculation aims to ensure that the repayment of capital and the payment of interest are perfectly balanced, and that the amount of the annuities is linear.
tiered or smoothed loan: in both cases, the borrower only begins repaying the new loan after having finished repaying an older loan (consumer credit, for example). We speak of a “tiered loan” when bank A lends and agrees to postpone repayment until the borrower finishes repaying bank B. On the other hand, it is a “loan smoothing” when the bank A agrees to defer repayment after the borrower has finished repaying an older loan contracted with this same bank A. The difference between the two concepts therefore lies only in the origin of the lender.
The bond loan
We talk about bond borrowing when a company (or a State, or a bank) issues bonds to finance itself. Bonds are debt securities purchased by lenders that the company undertakes to repay with a fixed or variable interest rate, on a date defined in advance.
In France, for example, the State issues Treasury Bonds (OATs), generally redeemable after 10 years.
For the company, it is another way of financing itself, apart from the banks, if the latter refuse to lend or if their conditions are not attractive enough. Bonds are not shares , since they do not give the holder any shares in the company, nor any right of decision in the event of an AGM. But the bonds can be converted into shares if the contract signed between borrower and lender specifies it.
Only companies with at least two years of existence and having fully paid up their capital on time. When setting up a business, the entrepreneur does not have to provide all the capital (20% for SARLs , 50% for SAS), but he must have completed this capital by the date set in the company status.
If the company were to go bankrupt, the investors who had purchased bonds would be reimbursed even before the shareholders. It is therefore a relatively safe form of investment for investors.
In the case of the bond loan, the repayment rules are very similar to those of the undivided loan.