Loan and financing are things that are part of the daily lives of people and companies. The two types of operation are also present in the nucleus of the National Financial System (SFN), which provides the necessary conditions for the money to “change hands” in society with security.
As far as the use of financial resources is concerned, there are people and companies that have plenty of money – that is, they are surplus agents or savers. There are also individuals and businesses that have resources short of what they need – hence, they are deficit agents or borrowers.
Because each individual agent has specific needs in terms of values and the deadline for payment or receipt, it would be difficult to negotiate money transfers from person to person. In order to solve this obstacle, the financial institutions serve precisely to promote the circulation of money.
Due to the similarities between loan and financing agreements, many entrepreneurs confuse these two terms and end up in a real snowball thanks to the high indebtedness of the business.
With that in mind, we prepared today’s post with the goal of better exploring the difference between loan and financing. Follow us!
What is loan?
The loan is a contract entered into between a financial institution and a natural or legal person – you receive an amount and you must repay it with interest in a predetermined period.
When the client makes a loan, it does not have to justify or link the funds received for a specific purpose. That is, it can use this amount to consume goods or pay for other debts without the need to explain to the bank where the money will be applied.
In loans, interest rates and taxes charged are usually higher – as the risk of default for the bank is widened. This happens because the institution, in addition to not being aware of the allocation of the amounts granted, usually does not require any guarantee of debt settlement.
The main advantage of this form of capture is the ease and speed in achieving the desired resource. Even those who already face financial difficulties the longest and have the dirty name on the square can take a loan without facing major problems or constraints – of the type having the request denied. Moreover, if compared to overdraft, the loan offers more interesting conditions and that can prevent the whole situation from turning a snowball in the financial life of those who borrow money.
However, it should be noted that as a disadvantage the loan continues to present one of the highest interest rates in the market and this requires some planning so that the borrower can honor his obligation at the end of the contracted period.
The ease of credit can also be quite dangerous for those who fail to plan. Borrowing a larger resource than is really necessary is not a very difficult behavior to be seen. This can accentuate a possible difficulty in paying off the loan and thus should be a point to be considered.
What is financing?
Like the loan, the financing agreement consists of the granting of credit to an individual or legal entity by an accredited financial institution. Payment is made with interest and charges within a specified period.
Financing usually offers more advantageous options for the client, since the interest rates are lower. In return, these contracts require some good as a debt guarantee.
In mortgages, for example, the contractor acquires credit for the purchase of a property, but ownership of the property will only be transferred to him when the debt is completely paid off. If the debtor does not honor the commitment to repay the debt installments, ownership of the property will be transferred to the creditor financial institution.
Another peculiarity of financing is that the funds borrowed by the bank should be linked to a specific purpose. This means that when the client hires the financing, it already establishes, in advance, the allocation of resources. Therefore, there are specific financing for the purchase of cars, real estate and machinery for the industry, for example.
Thus, the advantage of financing is that those who opt for this alternative leave with the asset or resource in the act, facilitating the acquisition process or the capture of credit even though the asset is not yet removed. In addition, financing rates – as well as their timing – may be more interesting for those who are financing.
However, the disadvantage is that this transaction is tied to the financial institution involved and this may represent a major problem when repaying the debt. If the person who has taken the financing can not pay it at the end of the contract, the financial institution can take the good and the money paid until then is not returned. Unless the sponsor can resume payment, the property is owned by the institution and may be auctioned after some time.
What are the main differences between loan and financing?
As discussed, from the point of view of the nature of the transaction, loan and financing are forms of credit offered to individuals and companies by a financial institution. In both borrowers they are committed to repay the originally borrowed amount plus interest within a certain time frame.
Check out the most relevant differences between the two forms of credit:
While in the loan the individual or company can spend the money however they want, in financing the amount taken must have a specific destination – such as home purchase, car purchase, etc.
In financing, it is common for the institution to ask the customer for some kind of guarantee for the value taken, which can be the asset itself. Therefore, in case of default, those who took the money would have to return the car, the property or the machine to the institution that financed the purchase of the property.
In the case of the acquisition of an apartment in the plant, it is common for the financed amount to be paid directly to the construction company, based on some requirements – such as inspection of the works. Therefore, in this situation the client of the financial institution does not get to move the money.
Financing involves greater care in credit analysis than the loan . Therefore, it is possible to obtain more significant amounts with lower interest rates and longer repayment terms.
The value of the loan , in turn, is usually limited to the profile of the company and the entrepreneur who hires it. Thus, the higher the risk, the lower the value released by the financial institution tends to be and the lower the debt repayment term tends to be.
What are the facilities offered?
There are programs that make life easier for those who need extra help whether to make a new investment within the company, renovate the infrastructure, or even close the accounts at the end of the month without going red with any vendor. These programs consist of giving incentives to entrepreneurs in need of external capital, from offering more competitive rates or more interesting deadlines.
An example is the Federal Government program named National Program for Productive Microcredit Oriented (PNMPO). According to the Sebrae website , in addition to facilitated credit, this program also provides technical support to targeted productive microcredit institutions, with the objective of institutionally strengthening these organizations that provide services to popular entrepreneurs.
In this way, the entrepreneur has access not only to the financial resource necessary to actually accomplish what is intended. This is because credit institutions also receive guidelines that aim to assist each manager in this task. This is a government incentive to generate more work and income and thus move the economy through entrepreneurs and their companies.
Therefore, on its website , the Ministry of Labor explains in more detail the subject, including the source from which this resource comes out and the operating institutions.
With regard to financing, financial institutions often also create special facilities and conditions to become more competitive when compared to their competitors. Before making a decision by the lending institution, it is important to conduct a cautious search with all the information regarding the financing conditions. This includes the interest rates charged, the duration required by each contract, among others. Having done so, contrasting all the options together is a way of understanding which is the best alternative for your case and context.
When is it better to lend or fund?
Often, a company needs money to meet some needs, which may be short-term – like working capital – or long-term – like opening a branch office. In these cases, she goes in search of credit in the financial market, goes through the analysis steps of the creditor institution and, in case of approval, receives the requested amount.
Loan and financing can also be considered financial products. So, before choosing between one and another, the borrower will need to analyze the so-called Total Effective Cost (CET), which will tell you exactly how much money will be taken from the institution at the end of the contract with the inclusion of interest, taxes and charges.
It should be noted that this cost will depend on each customer, the basic interest rate of the economy (Selic), the economic context and any guarantees. Still, the loan is usually used in the short term and long term financing.
In choosing between a loan and a financing, you need to study what the purpose of the loan will be. If it comes to meeting some day-to-day business need – such as buying equipment, paying for a vendor or working capital training – it is more advantageous to borrow.
However, if the entrepreneur has plans to expand or modernize his business and for this he needs a larger amount of capital, the financing will better meet his objectives and have a much lower Total Cost Effective.
How can you pay less interest?
Customers who have good relationships with financial institutions tend to be able to make loans and financing with lower interest rates. In addition, when the loan is made with collateral such as car or property, the interest can also be more in consideration.
Financing can be cheaper if the financial institution has a specific line of credit for a particular area – such as agriculture, construction and industry.
Nowadays, as the power to lend is no longer only in the hands of the banks, the borrowers can also research the conditions offered by companies that lend directly over the internet.
Some ways to pay less interest are: use of bills, avoid delinquency and have a good track record of negotiating with the bank. All are factors that make the credibility of the borrower ‘s loan or funding increase.
With this, it is possible to negotiate interest rates and payment terms that are more interesting and that make it easier to fulfill the obligation at the end of the contract. Otherwise, a bad payment history marked by delinquency and delays causes the lending institution or bank to incur a greater risk when making the loan or financing.
This risk is offset by higher interest rates that can balance potential payment problems, preventing the institution from incurring any loss.
Have you ever needed to borrow and finance your business? This need for external financial assistance can leave many managers unsure and concerned about the sustainability of their business.
The association that borrowing money often means not having control of one’s accounts can be scary for some people. According to IBGE , in the last two years more companies closed than they opened. In addition, the statistics of enterprises that close their operations before reaching the age of five is 60%.
These are evidences of the difficulties that the Brazilian entrepreneur faces to keep his company active and with volume of negotiations, but that must be avoided in order to resume the turnover and achieve positive results. Understanding the difference between loan and financing is an important step towards this.
However, with some study it is possible to interpret the scenario the company is going through and thus understand each deficiency that needs to be addressed. If you also want to know more about this, check out the article “When is the right time to make a loan for your company? “And feel more comfortable to make the best decision possible!