Loan and financing are part of the daily lives of people and companies. Both types of operation are also present in the core of the National Financial System (SFN), which provides the necessary conditions for money to “change hands” in society safely.

About the use of financial resources, some people and companies have surplus amounts – that is, they are surplus agents or savers. Some individuals and businesses have fewer resources than they need – so they are deficient agents or borrowers.

As each agent, in particular, has specific needs about the amounts and the time for payment or receipt, it would be difficult to negotiate money transfers from person to person. To resolve this obstacle, financial institutions serve precisely to promote the circulation of money.

Due to the similarities between loan and financing contracts, many entrepreneurs confuse these two terms and end up in a real snowball thanks to the high level of debt in the business.

Check out the most relevant differences between loan and financing:

Goal

While in the loan the individual or the company can spend the money as they want, in the financing the amount taken must have a specific destination – like buying a house, buying a car, etc.

Warranty

In financing, it is common for the institution to ask the customer for some type of guarantee for the amount taken, which may be the asset itself. Therefore, in case of default, whoever took the money would have to return the car, property, or machine to the institution that financed the purchase of the property.

In the case of the acquisition of an apartment in the plant, it is common for the financed amount to be paid directly to the construction company, based on some requirements – such as inspection of the works. Therefore, in this situation, the client of the financial institution does not manage to move the money.

Credit

Financing involves greater care in credit analysis than lending. Therefore, it is possible to obtain more significant amounts with lower interest rates and longer terms to settle the debt.

The loan amount, in turn, is usually limited to the profile of the company and the entrepreneur who hires it. Thus, the greater the risk, the lower the amount released by the financial institution tends to be, and the shorter the term for the settlement of the debt tends to be.