Bank loans

When an entrepreneur lacks funds to run or expand the business, a common way is a bank loan, that is money lent in cash form by banks. The principles of lending are purposefulness (what it is taken for), term, repayability, payment (interest is paid) and security. Loan types: commercial credit as deferred payment between firms, long-term mortgage credit secured by real estate, and consumer credit for long-use goods. Interest rate = payment on the loan / loan amount × 100 %; for example if 440 000 so‘m is paid per year on 2 000 000 so‘m, the rate is 22 %. In banking practice interest is charged on the remaining debt; in the method shown in the textbook the principal is repaid in equal parts and each month interest is taken from the declining balance (in another method, the annuity, the monthly payment is equal). The rates in this section are only imaginary for learning; real terms are found from the bank and the contract. Loan security: collateral (property), a bank or insurance guarantee, a third party’s surety, an insurance policy. The bank also assesses the client’s ability to take a loan: net income = income received − permanent expenses; creditworthiness coefficient = net income / monthly payments; the bank compares it with its own norm. A loan can bring profit but can also sink an entrepreneur in heavy debt, so the terms must be read carefully; no advice is given here to anyone about taking or not taking a loan.