A straight loan is a lesser known form of borrowing money for professional borrowers.
When one talks about investing and trading, creditors quickly overcharge an investment credit or cash credit .
However, straight loans can be more profitable for many self-employed people and entrepreneurs. What is a straight loan and what are the main characteristics of this type of credit?
What is a straight loan?
A straight loan, also known as a fixed advance or fixed-term advance, is a short-term loan . A straight loan in particular bridges a previously known period between 1 month and 1 year in which temporary financial support is required. After this period, the borrower will repay the borrowed capital and the interest in one go.
A straight loan therefore serves to absorb temporary liquidity shortages in the company. For example, it may be that as a trader in car parts it is possible to buy a large batch of winter tires. Since there is usually never such a large stock, one will probably need a credit to pay for it. When after the winter peak all winter tires are sold at a profit, the capital loaned and the interest due are paid back to the bank in one go.
At that moment the entire debt has been repaid and people are no longer bound by a credit. A straight loan therefore has a number of similarities with a cash credit, since they are both intended to cover cash requirements (also called temporary needs for money). With a straight loan, a relatively high amount will be made available. Following the example from above, the cost price of the winter tires can go up to 250,000 euros.
Target group straight loan
The example clearly shows that a straight loan is intended for large (un) expected expenses. As a result, this loan has in the short term mainly large companies and self-employed people with a considerable turnover as a target group. Government institutions that wish to finance a large purchase can also apply for a straight loan.
Professional borrowers looking for a cheap way of borrowing money to absorb a rather limited money shortage, such as eg an invoice of € 1,000 or € 2,500, make better use of a cash credit.
Running time straight loan
Straight loans are usually closed for a definite, fixed term. The duration of the straight loan is freely agreed between the borrower and the lender, taking into account the financing needs of the borrower. Most creditors use a term of at least 1 month (or exceptionally 1 day) to a maximum of 1 year.
Since the straight loan credit agreement is concluded for a fixed term, this means that the borrower must strictly respect the due date. On this date, the amount of the straight loan, plus interest, must be repaid.
If desired, a new straight loan can be taken out at that time, again for a definite, fixed duration. The interest on this new straight loan will differ from the first interest rate and will be determined on the basis of the market interest rates at that time.
With certain creditors, however, it is possible to conclude a straight loan for an indefinite period. This means that you actually close a credit line or credit line without an end date. The amounts withdrawn will have to be repaid every month, 3 months, 6 months or 12 months. The difference between a straight loan of fixed duration and straight loan of indefinite duration is that with a straight loan of indefinite duration it is possible to include a lower amount (eg € 25,000) per draw than the maximum amount. of the credit line (eg € 250,000).
Interest straight loan
A straight loan credit has a predetermined interest rate. The borrower and creditor agree at the start of the credit agreement which interest will be applied throughout the duration of the credit.
In the case of a straight loan of definite duration, on the due date, in addition to the borrowed capital, the total interest is paid immediately in one payment for the number of months that the capital has been used. With a straight loan of indefinite duration, the same interest rate will always be applied, but this fixed interest rate can be adjusted at regular intervals. The advantage of this type of straight loans is that you only pay interest on the amount of the draw.
If, for example, you withdraw only a draw of € 25,000 from the credit line of € 250,000, you will only pay interest on this € 25,000. The interest rate that financial institutions apply to this, of course, varies from institution to institution. Most creditors do use the Euribor rate plus interest. This is the average rate of a number of large European banks.
In addition to the interest, as a borrower, a number of other costs will also have to be taken into account. These other costs include: a provision for the money being made available, a file and / or administrative fee for setting up, amending and canceling the short-term loan (usually expressed as a percentage of the credit amount) and a management fee per quarter (eg € 15).
Straight loan benefits
- Quickly available . Most creditors are a butcher to make the money available within 48 hours. In this way one can respond to rapid evolutions of the market and, for example, purchase the winter tires immediately.
- Profitable interest . In comparison with other forms of credit for professionals, such as a cash credit, a straight loan has an advantageous interest rate. For example, there are certain creditors that apply a straight loan interest rate of 2%, while rates of 8% with a cash credit are no exception. Thanks to a straight loan loan, you can borrow money for a short term, without having to pay a high interest rate. Sometimes bankers do not automatically propose a straight loan, since this results in less interest for a financial institution. So, when comparing proposals from financial institutions, do not forget to inquire about the possibility of converting the overdraft into a straight loan.
- Predictability . With a straight loan of definite duration, you know in advance how long one is tied to the credit. On the due date, the borrower must, after all, repay both the borrowed capital and the interest.
- No need for justification or justification . While with an investment credit you may have to submit the invoices of the machines or the contractor to a building, you do not need to motivate the requested drawings with a straight loan. For example, with a straight loan of indefinite duration you will never have to motivate why and when you want to make a draw.
- No financial ballast during the credit . The great advantage of a straight loan is that you do not have to repay capital during the term of the loan. With straight loans, both the withdrawn capital and the total interest due are paid back on the due date. In the case of a classic investment credit, a share of capital and interest is paid periodically.
- Tax deductible . The interest and related costs of the straight loan are tax deductible as a professional expense. As a result, the net cost price of the straight loan is actually slightly lower than the rates with which lenders display.
Disadvantages and concerns with fixed advances
- Limited flexibility . In contrast to a cash credit, with a straight loan of fixed duration, there is virtually no flexibility. In other words, there is no possibility to quickly add € 2,500 extra. The amount that is included on the start date is the amount that must be repaid after the loan has expired.
- Inability to extend the credit . With a straight loan of fixed duration, the term of the credit agreement can not be extended. This means that a new straight loan must be concluded at the end of the credit agreement.
- Limited options for early repayment . With a straight loan you will be financially sanctioned if you repay the loan early. Thus, in any case, the interest on the amount of the draw must be paid until the due date.