A business loan is often provided to make an investment or to pay for an acquisition. Usually, the person who provides a business loan will require collateral. Collateral is a type of guarantee that you provide to the person who has provided the business loan. For example, pledging your debtors and/or your stocks. By providing collateral, the lender increases the chance that he will still receive a large part of his loaned money if it is not (or no longer) repaid.
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Suppose you borrow from the bank an amount of € 100,000 for the purchase of a machine. The bank will then require as security that they will receive the lien on this machine. If the entrepreneur no longer meets the repayment obligations at any time, the bank can sell the machine in order to get back part of the business loan.
Please note: if the business loan with the bank has been fully repaid, ensure that the bank cancels the loan agreement and the securities are released. As a result, security can no longer be invoked. You may think that banks do this on their own, but that is not always the case.
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Blank business loan
If you get a business loan for which no collateral is provided, it is called a blank loan. This means that the lender knows for certain that he will not get back the outstanding part of the business loan if the entrepreneur can no longer payback.
Subordinated business loan
With a subordinated loan you agree with the person who provides the business loan that he is only entitled to repayment of the business loan if all other loans and creditors have been repaid.
Current account credit and the seasonal credit
The current account credit is the most common form of financing in SMEs. With a current account credit, you agree with the bank that you can be red up to a certain amount, the ‘credit limit’.
For example, you use current account credit to bridge the difference in payment terms between customers and suppliers. Very often the entrepreneur has to pay his suppliers and staff earlier than he gets paid from his buyers. The collateral that you have with a current account credit is usually related to the debtors and the stocks.
Tip: do you only need the current account credit for a specific time of the year? Then agree on a seasonal credit with the bank, which is cheaper than a current account overdraft.
An entrepreneur runs a campsite. This campsite is open from April to October. In the period November up to and including March, the entrepreneur must live on the money he has earned in the preceding period. In April, however, the money is largely exhausted, at the same time he has to make expenses again to start the business. He agrees with the bank that he will receive a seasonal credit every year for the period of April – October. In November this credit is withdrawn because he has enough money to get through the fall and winter.
Self-employed with seasonal work? Would this also apply to self-employed workers in construction, for example, for the days on which he cannot briskly because of the frost? Unfortunately, that will not apply because the work that the entrepreneur performs is personal. In this case, the bank will advise you to save so that it can continue to live during difficult times.