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It is a sum of money paid by a lender to a borrower, who agrees to repay the loan with interest over a period of time.

Borrowing means going into debt. Do not hesitate to read the article on the debt ratio or browse our blog to learn more about business billing.

A loan is a contract between a lender and a debtor, who therefore incurs a financial debt.

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The operation for a direct lender loan according to consists of requesting the provision of a sum of money at a fixed rate and for a definite period, for the purchase of consumer products.

In the world of small businesses, the loan is usually contracted from a single bank to cover the financial needs of the activity.

Of course, the more the company generates wealth, the more its debt capacity increases.

There are two main types of loans:

  • the undivided loan that is most commonly contracted by individuals and SMEs.
  • the bond loan which is a financing solution exclusive to large companies.

The undivided loan

It is a loan made by a single loan to a single lender, mostly a bank. Three essential notions must be taken into consideration:

  • depreciation: this is the repayment of the capital borrowed alone,
  • interest: it is the remuneration received by the lender, which the borrower pays in addition to depreciation,
  • annuity: amount disbursed periodically by the borrower to repay the lender. It, therefore, corresponds to a portion of the amount borrowed plus the interest payable to the lender for its service.

There are three amortization-repayment formulas-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 principal remaining to be repaid.
  • repayment in fine: each month, the borrower only pays the interest on the loan. The borrowed capital will only be repaid at the end of the loan period and at one time. 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 the company will have to be able to repay the capital in one go.
  • constant annuity: the borrower pays absolutely identical monthly payments from the beginning to the end of the period. Indeed, the calculation is that the repayment of capital and the payment of interest balance perfectly, and that the amount of annuities is linear.
  • tiered or straightened loan: In both cases, the borrower begins repaying the new loan only after he has finished repaying an older loan (consumer credit, for example). We are talking about “bank loan” when Bank A lends and agrees to postpone the repayment until the borrower finally pays off bank B. This is a “loan smoothing” when Bank A agrees to defer the repayment after the borrower has finished repaying an older loan from the same bank A. The difference between the two concepts, therefore, lies in only the origin of the lender.

The bond loan

We talk about a bond issue when a company (or a state, or a bank) issues bonds to finance itself. Bonds are debt securities purchased by lenders that the company commits to repaying with a fixed or variable interest rate on a pre-defined date.

In France, for example, the government issues treasury-equivalent bonds, which are generally repayable after 10 years.

For the company, this is another way of financing, outside banks, if they refuse to lend or their conditions are not attractive enough. The bonds are not shares since they do not give the shareholder in the company, nor the right of decision in case of AG. But 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 have fully paid up their capital in time. When starting a business, the entrepreneur does not have to bring all the capital, but he must have completed this capital by the date fixed in the status of the company.

If the company goes bankrupt, investors who bought 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 issue, the repayment rules are very similar to those of the undivided loan.