A straight loan is a short-term credit form that can only be applied for by entrepreneurs. It is an alternative to other professional lending formulas such as investment credit and cash credit. What is now such a fixed advance or straight loan?
Borrow money via fixed advance payment
A straight loan is a short-term credit for the company to meet all short-term needs.
An example of this is the payment of suppliers, pending payment to the own customers. It also serves to finance a large purchase in the short term so that temporary liquidity shortages can be avoided. This can be a real estate, but also a large purchase of stocks.
A fixed advance (or fixed-term advance) has a period of approximately 1 month to a maximum of 1 year. Once the term has expired, the capital and the interest will be repaid. Optionally, one can (again) take part in the form of a new contract.
A straight loan has many similarities with a cash credit . Nevertheless, a straight loan is previously intended for larger amounts. For smaller amounts, overdrafts can in principle comply with temporary liquidity shortages.
Duration and interest straight loan
Usually the term of a straight loan is predetermined. This is different for a cash credit that has no final maturity. The duration of a fixed advance is usually 1 month to a maximum of 1 year.
Since the final due date is determined, this also means that the entire loan must be repaid. This repayment includes both capital and interest ! The financial institution will recover the amount together with the interest.
Tip : Make sure you also have a cash credit. If there are insufficient funds to repay the whole credit, then the overdraft facility can be used for 1 day and you can opt to (partially) withdraw the straight loan.
In principle, it is also possible to repay the credit fixed advances early.
The interest rate that is charged is agreed in advance. That way you know perfectly how much interest should be paid. With the extension of the straight loan it may be that the interest rate is adjusted. This is because the term of the original credit has expired.
What you may also have to take into account are other costs that can be charged. This can be a provision for keeping the money, file costs and administrative costs and any management costs available.
Advantages and disadvantages of straight loan
A fixed-term deposit is usually available very quickly . Most credit institutions manage to complete the dossier within two working days. The speed to have access to the credit can sometimes be very important.
All formalities are known in advance. Both the term and the interest rate were contractually agreed. So no unexpected surprises can come to light. However, there is usually freedom to, for example, repay the loan early.
As it is only expected that the full repayment will take place after the credit has expired, there will also be no extra financial pressure during the term of the credit.
You can also benefit from a relatively attractive interest rate compared to other credit formulas such as the cash credit. For larger purchases, it is therefore important which credit is the most eligible. In some cases this is a straight loan, but it can also be an investment loan.
Finally, both the interest and additional costs are fully tax deductible because it concerns a business loan .
However, we can also make our reservations when using a fixed advance. In terms of flexibility, a straight loan is slightly more limited than a cash credit. Using a cash credit for smaller amounts can be a better move in some cases.
You also have to pay back the entire credit including the interest at the end of the term. If this is not possible, you will have to take out a new straight loan.
An early repayment of the credit is usually possible, but it may be that financial sanctions are linked to this. Discuss this best in advance with the lender.
Straight loan or investment credit?
Both an investment credit and a straight loan serve to finance a large investment. Because of the limited duration of a straight loan, it is interesting to bridge a temporary shortfall. This could be, for example, the purchase of a large stock or a purchase with which you can respond to a market opportunity.
An investment loan will have to be repaid periodically through the fixed term that can last longer than a year. It can therefore also serve to finance a large purchase. This could for example be a warehouse or building if you can not repay the credit in the short term.