Loan or financing: what are the differences and which is the best option for the company?

A company faces several challenges throughout its activity and it is up to managers to solve them. But what happens when a setback arises and it is related to finances? It is common for administrators to look for a loan or financing to resolve the issue.

However, do you know what the differences are between the two services and which one would be the best decision for the problem? Generally, these questions appear whenever the manager finds himself during the formulation of his  strategic planning  and fears going down the wrong path.

To help resolve your doubts once and for all, we have prepared an article where we tell you how these services differ and the advantages and disadvantages of each of them so that you can choose wisely. Check out!

Differences between loan and financing

Two ways to get money for whatever  your company needs  at the moment, financing and loan services have some differences .

Loan

The mechanics of a loan are based on borrowing funds from a bank or institution authorized to provide this type of service. In this way, you borrow an amount of money from the finance company and, in return, it will earn the interest that you will pay in the process.

This way of acquiring resources is widely used thanks to its low bureaucracy and is generally adopted as the most practical means of obtaining money. Therefore, banks have developed a series of loan characteristics, where:

• it is not necessary to explain the reason for taking the appeal;
• normally there is no asset as collateral;
• the agreement between the parties is the only security of the process;
• interest rates are higher due to the high risk of default that the institution assumes.

In practice, a loan is acquired when the borrower needs to obtain a resource quickly and without much bureaucracy. For this reason, it is generally more expensive than financing.

Financing

Financing is also a resource and its purpose is to resolve a financial setback, generally in the long term. However, this type of service has a series of peculiarities that differ from the simplicity of the loan, such as:

• the need to explain to the bank the reasons for taking the money and how the resource will be used;
• the financing guarantee is, generally, the asset itself that will be financed;
• need to present a series of documents, such as the Balance Sheet and the Income Statement for the last 3 years;
• the amount taken can be delivered directly to the seller of the good;
• the bank requests periodic proof of the application of the money as presented in the project.

As you can see, there are many requirements for financing to be approved by a financial institution. However, the bank offers much lower rates compared to a loan, as there is greater transparency and more solid guarantees.

Advantages and disadvantages of loan and financing services

Normally, the pros and cons of a loan or financing are closely linked to the financial institution that will grant the credit. Therefore, it is up to her to create ways to facilitate the taking of the resource while maintaining the main characteristics of each one.

In general, the advantages of a loan are the ease of access to the resource, in addition to the possibility of credit with some financial institutions even with a negative account. The disadvantage is, of course, the risks of this service, in addition to very high fees.

In the case of financing, the company has the possibility of bargaining with the financial institution when presenting the project, in addition to having access to low interest rates. On the other hand, this type of service does not have immediate liquidity and can be quite bureaucratic until approved.

Types of loans and financing available

The credit market has several different types of services that involve taking out resources, whether in the form of a loan or financing. Therefore, entrepreneurs need to research the market for the best type of operation for their company’s profile.

In the case of loans, banks and financial institutions generally have a few options, three of which are most used by companies:

• fixed investment, used to finance any expansion of the company;
• working capital, which is used when the company needs short-term resources;
• mixed investment, especially contracted when the client needs working capital and fixed investment.

For financing, the range of options is even more varied due to the more conservative nature of this type of service:

• leasing, which is used for machinery and vehicles in general, where the guarantee is the asset itself;
• project financing, intended for major initiatives, such as opening a factory;
• debentures, which are debt securities of a company that issues papers to raise funds directly from third parties — who earn interest from this exchange;
• crowdfunding, financing aimed at launching a  new product .

How to know when to opt for a loan or financing

To reach the final decision, the manager needs to carry out a prior analysis of the company’s financial situation. Only in this way will he be able to distinguish which of the credit options best fit what was planned.

Generally, the need for a loan is linked to some short-term or emergency need. Managers opt for this service in specific situations. Some examples are: correcting a hole in the company’s cash flow or paying off a very damaging debt.

In the case of financing, the company that adopts this service is launching a long or medium-term project where there is strong planning. This way, it will be able to obtain a resource with more attractive rates than the loan to carry out the project.

How to prevent yourself when obtaining one of these resources

To take precautions when carrying out a loan or financing operation, the manager will need to take a series of precautions. This means you will be safer when accepting a credit offer and will be able to use the resources acquired as planned.

You must always be suspicious of rates well below the market. Pay attention to the contract’s guarantee clauses and try to carry out simulations of how you will apply the resource so as not to take more money than necessary. These measures will help you to protect yourself from obtaining credit.