Knowledge base item

Different types of bank financing

Bank financing can take place in several ways

The bank is one of the most well-known forms inthe financing mix. The choice of a type of bank financing depends mainly on the type of investment.

Are you investing in property (purchase or renovation), business equipment, means of transport, machinery or inventory? The best way to finance this is with a medium or long-term loan. The most common form of repayment is the linear repayment. With a linear loan you pay a fixed amount of repayment to the bank each term. The term of the loan is then often equal to the life or depreciation period of your investment. An acquisition can also be financed with a medium-term loan.

Are you investing in stock, inventory, working capital or pre-financing projects? If so, an overdraftfacility is a good form of financing. You are allowed to be in overdraft on the current account up to a certain pre-agreed limit.

These forms of financing often require a personal contribution or a minimum amount of guarantee capital. There will also be a test as to whether the profitability (often measured atEBITDA level) is sufficient to meet your banking obligations. You also see so-called financial covenants related to the amount of interest to be paid, which may not be too high in relation to the profitability. This covenant is known as the Interest Cover Ratio, which as a rule must not exceed four times the profit.

"That way you avoid still paying for an asset that has already been written off."

If you want to finance as much as possible on a specific object,leasing is often a better option than a regular loan or RC-credit through the bank. This is possible if you invest in transport means, machines and other business assets. You pay a fixed amount per month (annuity repayment) consisting of an interest and a repayment component. The term is never longer than the economic life or depreciation period of the asset. This prevents you from still paying for an asset that has already been written off. The advantage is that you can finance the entire investment. You can contribute your own money if you want to reduce your monthly costs, but that is not necessary.

In the case of bank loans, there are various possibilities for using government guarantees. The best known form is the BBMKB, which is also often used to facilitate acquisitions.

Share on: LinkedIn E-Mail

Do you want to know which type of bank financing best suits your organisation?

We would like to get in touch with you to discuss how we can best be of service to you.
Marieke Klaassen
Marieke Klaassen van BeurdenPartner