If you want to found, take over or expand a company, you usually have to factor in high financial expenses. If your own liquidity is not sufficient for these measures, there is usually no way around financing.
In everyday life, the term credit is often equated with the term loan, where strictly speaking credit is one umbrella term is and the loan one subcategory representing the types of credit. This article is intended to help you find your way through the jungle of credit types and to be well-prepared for your next bank meeting.
What is a credit?
A loan generally refers to the provision of money by a lender to the borrower. The conditions and the payment obligation are recorded in a loan agreement. Typically, the borrower pays the lender interest over the period of the money loan.
Depending on the type of loan, a distinction is made between fixed debit interest and variable interest. The fixed borrowing rate is fixed for the entire term of the loan, while the variable interest rate can fluctuate over the term. There are also differences when it comes to repayment. Either the loan is repaid on an annuity basis, which means that a repayment installment is paid monthly over the term. Or the loan is paid at the end of the term in one sum and the accruing interest is paid monthly. This is called a final loan.
The most important types of credit are listed below.
The main types of credit
overdraft facility: The most well-known and unbureaucratic type of credit is popularly called overdraft facility. The overdraft facility is a type of loan that does not require a traditional loan agreement. The borrower’s house bank grants an overdraft facility. How large the overdraft limit is depends largely on the monthly cash receipts and the personal creditworthiness of a borrower. Of course, interest is also charged when the account is overdrawn, which is set comparatively high so that the overdraft facility is repaid promptly.
mini loan: This is a special variant of the loan types, which is offered in particular by fin-techs. These are microloans of around 500-600 euros. Similar to the overdraft facility, the loan is repaid in one or two installments within a few weeks. The interest rates for the mini loans are also similar to those for the overdraft facility, which in turn encourages rapid repayment.
line of credit: Also called an on-demand loan, it is a hybrid form between an overdraft facility and a classic installment loan. Here the borrower receives a credit line, which is mapped to a sub-account. This credit limit can, but does not have to be exhausted. Accordingly, only interest accrues on the loan amount actually used. A monthly repayment of the loan used is provided for this purpose. Here, either a previously contractually regulated percentage of the loan or a fixed amount is repaid.
installment loan: This form of credit represents a separate subcategory of credit types and lists the types of loans as follows:
- installment loan: This type of loan is generally considered to be the cheapest form. Here, monthly installments are agreed, which decrease as the loan is paid off. The shortcoming of this form of loan is that interest and installments are a comparatively high financial burden, especially at the start of repayment
- forward loan: This type of loan is considered to be particularly reliable for planning over the years, because forward loans are taken out when borrowers want to secure a loan interest early because they expect that the interest rate level could rise by the time the loan agreement is concluded later. The loan can have a term of one to ten years, while the forward (interest rate hedging) is only contractually regulated with a maximum term of three years.
- annuity loan: This is the classic among the loans. The borrower pays the same installments throughout the term. During the loan repayment period, for example ten years, the borrower pays 500 euros a month, for example. At the beginning, the majority of the amount to be paid is interest, which decreases as the loan is repaid, while towards the end of the repayment almost the entire portion of the 500 euros consists of repayment installments. Through this dynamic, as time goes on, the loan is repaid faster and faster while the interest payments decrease. As a rule, no special repayments are permitted here.
- maturity loan: This type of loan has the lowest monthly installments, since with a maturity loan there is only no interest during the term and the entire amount only accrues at the end of the term. In order to be able to implement this type of financing, a so-called repayment replacement is required. This serves as security for the lender and can represent, for example, a savings account, a home savings contract or similar.
- Euribor loan: This type of loan is considered to be one of the most flexible and requires further explanation. The term Euribor refers to a reference interest rate at which the current interest rate of the loan is adjusted to the Euribor in fixed sections. The Euribor, in turn, is calculated by the bank according to the current key interest rates of the European Central Bank. This can vary from bank to bank. With this type of loan, special repayments are possible at any time, and it is also permitted to apply for conversion into a fixed-rate loan. Here you can fix the cheapest interest rate at the given time.
- Participation Loans: This is a participation loan. The borrower can only be a legal entity, i.e. a company, because here company shares are given in exchange for a financial loan instead of current interest. This type of loan is usually used to expand the company and thus allow the financial resources to flow into investments and working capital. In most cases, this type of loan is processed without the involvement of a bank. Banks are increasingly offering participation programs depending on the federal state.
- term loan: Popularly known as LAUDA, this type of loan describes the initial determination of the interest amount, which in turn is added to the loan amount. Thus, the loan amount increases and the amount remains the same over the entire term.
- P2P Lending: This loan is not given by banks, but by private investors via online platforms. This form enables a faster and less complicated way of obtaining a loan, but requires very high interest rates in comparison. This is due to the increased risk for the lenders, which the platforms try to counteract with a highly diversified portfolio.
- mass loan: This special form of loan describes taking out a loan during insolvency proceedings from a bankruptcy creditor, who grants the loan so that ongoing operations in the company can be maintained. This procedure is taken over by an insolvency administrator and all liabilities of the insolvent company newly listed by the administrator are subsequently deemed to be debts of the estate. It is important that the mass loan always has priority over other creditors.
Professional business start-up advice pays off
The higher the financing amount, the more difficult and complex it is to compare and acquire the right loan. It is advisable to prepare the financing documents before the first talks with the lender, which for private individuals consist of a SCHUFA statement and pay slips and for companies a bankable business plan, financial planning and, if applicable, current sales figures, so that the bank talk is successful.