An investment loan serves to finance investments within a company so that growth can be continued.
Anyone who wants to start as a starting entrepreneur may already be warned about the high costs of starting an independent activity. For example, one will have to invest in a company building, provide a commercial vehicle and / or purchase other material.
Many start-ups use a commercial loan to finance these start-up costs. What is an investment loan and is there a difference with a cash loan?
What is an investment loan?
An investment loan is a financing for the purchase or replacement of tangible or intangible business materials or real estate. This form of borrowing money is specifically aimed at professionals who wish to finance the start-up or further development of their professional activity, such as the construction of a warehouse or office complex, purchase of machines or renewal of company cars . The acquisition of a business can also be financed through an investment loan.
An investment loan can be included both fully and in parts. The latter implies that the self-employed person must not immediately purchase all the necessary materials, but can spread them over time.
The general terms and conditions of the business loan will determine the maximum period within which the investment loan must be included.
The distinction between an investment loan and overdraft lurks within the term of the loan. While a cash loan is the solution for short-term financial shortfalls, an investment loan is focused on purchasing in the medium (2 to 5 years) and long term (5 to max. 30 years).
The investment loan is always concluded for a fixed, fixed duration. As a result, you know in advance how much you pay back and for what period. Keep in mind that loanors can demand a private investment from the borrower.
Target group investment loan
An investment loan is a business loan . This means that the loan is only accessible to the self-employed, practitioners of a liberal profession (eg architects, doctors and lawyers) and companies. No minimum share capital is required for the use of an investment loan. An investment loan can be concluded by both an SME and a large multinational.
Certain banks also open their corporate loans to government institutions, such as public companies, municipalities and cities. It is the various banks that individually determine the amount from which you can carry out a simulation investment loan and conclude a new loan. This leads to very different situations. For example, in practice investment loans from € 2,500 can already be closed, while other loanors require a minimum of € 5,000.
Duration of investment loan
The term of a business loan is highly dependent on the economic life of the financed good. The longer a company building or other material can be used, the longer the term of the investment loan will be. In order to determine what a reasonable age is of a good, one can take account of the fiscally accepted depreciation. For example, a home over 30 years, a computer over 3 years and vehicles over 5 years can be depreciated.
It is therefore advisable to spread the investment loan maximally over this economic life. Secondly, the lender will of course take into account the financial strength of the borrower. A large multinational will have more financial reserves and will be able to repay one company car faster than, for example, a starting SME.
Interest rate investment loan
One of the most important elements during an investment loan simulation is of course the cost price of the loan . loanors will charge an interest in exchange for a commercial loan, such as a cash loan or investment loan. The borrowers have the choice between a fixed interest rate or variable interest rate (eg annually, every 2 years, every 5 years).
Usually the variable interest rate will be lower than the fixed interest rate. However, it should be taken into account that with a variable interest rate the interest rate, and therefore also the cost price of the loan, can suddenly rise in the course of the loan.
As a borrower, each month (monthly, quarterly, semi-annually or annually) a part of the borrowed capital and interest will be repaid. In any case, you only have to start paying back as soon as the (first part of the) investment loan is included.
A borrower and lender can always freely insert an allocation-free period. This means that the borrower does not have to repay the withdrawn capital for a certain period during the business loan. Finally, certain loanors offer the possibility to conclude an investment loan with fixed capital repayments. As a result, an equal part of the capital is repaid each time on the due dates. However, the total repayment is decreasing because at the start the amount of interest is greater than at the end of the loan agreement.
Benefits of investment loan
The advantages of an investment loan can be summarized as follows:
- Possibility to spread investments in the long term. An investment loan can, in contrast to a cash loan, be concluded for a maximum of 30 years.
- Retention of own capital in the company. By making use of a bank for acquiring materials, the entrepreneur retains all his own financial resources. This own middle can perfectly serve as a financial reserve and ensures that the company is able to maintain a certain cash flow.
- Security and predictability . An investment loan is always concluded for a fixed duration. With the investment loan you know in advance when and how much you have to pay.
- Flexibility . If you do not wish to repay any capital temporarily, you can always voluntarily add an exemption free period. As a result, only interest is paid back during this period. Through the investment loan you never have to immediately take the entire balance.
- Interest and costs are tax deductible . The Belgian legislator encourages the use of an investment loan. All interests and costs of the investment loan can be deducted for tax purposes. In addition, the interest burden will also be lower than with a cash loan.
Disadvantages and concerns investment loan
An investment loan also has some disadvantages that you as an entrepreneur have to take into account:
- Long link with lender. The comparison of a simulation of cash loan and simulation investment loan shows that the investment loan ensures a longer financial ballast. After all, an investment loan can be taken out for a maximum of the economic age of the material (with an absolute ceiling of 30 years). A cash loan on the other hand only serves to absorb financial shortfalls in the short term. If the need for extra financial resources is very short, a cash loan is certainly worth considering.
- Uncertain loan cost for investment loan with a variable interest rate.
- Additional requirements of the lender. In order to secure the financial resources received, most loanors require a number of additional commitments with an investment loan. For example, the lender may require that no assets be increased in the future without approval or that the borrower retains the majority of the shares.