Business credit: what is it and how does it work?

A business loan is a line of credit granted by financial institutions or banks to companies. Regardless of your objective, to apply for and start a loan, you must provide proof of your bank details and National Registry of Legal Entities.

What to consider before taking out a business loan?

The first step before applying for a business loan is to define the amount your company needs at that time. This is because the installment amount cannot exceed 25% of the company’s net profit, since, if it does, the risk of default and situations with the federal revenue ends up increasing.

After that, it is necessary to research which financial companies or banks have loan options, in addition to the interest rates and guarantees they offer.

Furthermore, it is important after deciding the amount needed and which company, to make a new financial plan that includes paying off the debt.

Finally, it’s time to decide which investment to make. Below, we’ll show you the most commonly used types of investments.

6 types of business credit

Discover now the most common types of business credit.

1 – Loan with collateral

As the name indicates, a secured loan is one in which the customer borrows an amount of money from a financial institution but offers an asset as collateral for payment. The institution will have a right to the customer’s asset if the loan installments are not paid. The most common assets used in these cases are cars and real estate.

This type of loan offers lower interest rates than other types, since it has an asset as collateral for payment. Thus, when the collateral is a car, the interest rates are 1.49% per month. When it is a property, also called home equity, the rates start at 0.89% per month.

2 – Financing

Another type of business credit includes financing. Financing is a type of loan made for a specific purpose.

For example, say you want to buy a property for your company to serve as an office. You can go to the bank and apply for finance to undertake this purchase, whereby you can get partial or full financing to acquire the purchase in question. In such a case, financing will be performed by a contract that defines the amount and the reason for the loan.

In financing, the repayment term is up to 60 months, depending on the negotiation made with the bank or specialized financial institution. In the case of financing, the interest is slightly higher than the rate of the loan with collateral, varying between 2% and 7% per month.

3 – Working capital

Working capital is a type of business credit widely used for various needs related to companies’ cash flow, such as paying salaries, rent and suppliers.

The positive side of this modality is that, unlike what we said previously, working capital does not require an explanation of the reasons for the loan, in addition to allowing receipt in different ways (bimonthly, half-yearly or in full after the contract expires).

The disadvantage is that it is not a type of loan that can be paid in the long term, since the maximum installment is 12 times.

4 – Peer to peer

Peer to Peer (P2P) is a type of business credit that connects borrowers with investors. The advantage is that in this case, there is no need for a financial agent to carry out the loan; the investor himself negotiates with the client.

The disadvantage is the issue of security. In this case, the risk to the borrower is quite high. To avoid taking so many risks, investors often take out a partial loan and then send new amounts after the “first loan” has been paid off.

5 – Anticipation of receivables

As the name suggests, this type of business credit is, in reality, an advance on an amount that would already be received. It is a less bureaucratic process and very useful for entrepreneurs who do not yet have working capital.

In this case, the amounts receivable from the company become the guarantee for the payment of the loan. The advantage, as with a secured loan, is lower interest rates and cheaper, more accessible credit. It works well for shorter-term needs.

6 – Credit unions

Credit unions offer various types of business credit, such as credit cards, financing, working capital loans, etc. As they are non-profit organizations, they are also exempt from certain taxes, such as CSLL (Social Contribution on Net Income), PIS (Social Integration Program) and Cofins, ensuring better credit conditions.

They work as follows: to be entitled to credit, you must be part of the cooperative and purchase a share. This also requires participation in meetings and taking part in cooperative decisions.

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