Loan (finance)

The loan is a debt resulting from the refundable lending in the long term (funds poured under the terms of contractual provisions except for the current contests banking) which takes part, jointly with the stockholders' equity, with the durable cover of the financing needs of the company. According to the international standards the loans can be passive not currents (i.e. nonrelated to the normal cycle of exploitation or whose expiry exceeds 12 months) or currents according to their durations.

The term of loan is antonym of ready for that which provides the money. For the lender, it is a Créance (a Crédit), for the borrower, it is a Dette. The loan preserves the property right of " the purchaser-emprunteur" under cover nevertheless of possible conditions of guarantees.

It is possible to distinguish two types of loan:

• an undivided loan is a loan carried out near a single praetor (generally an financial institution).
• a debenture is a loan which is born from the emission of obligations which are distributed between many lenders. It is thus a loan reserved for the important companies which can reassure the investors.

Characteristics of the undivided loans

An undivided loan is a loan carried out near a single praetor. Refunding follows methods of damping and payment of interest stipulated in the contract (see Plan refunding).

• the damping is the refunding of the capital without taking into account the loads of interest.

• the interest is remuneration for the lender.

• the annual installment (or monthly payment , quarterly installment, etc) is the sum withdrawn periodically for the refunding and the load of interest.

Annual installment = annual damping of the capital + interests over the year

Types of undivided refunding

There are three formulas: refunding in fine , straight-line depreciation (even portion of capital refunded each year) or constant annual installment (even annual installment each year).

The credit in fine

The interest is regulated with the first constant annual installments.

The capital is refunded either in once after the payment of the interests, or with the following annual installments.

This provision has an interest when the refunding of the interests is more strongly deductible the first years, for example for a real investment within the framework of the law '' of Robien ''.

The undivided loan with straight-line depreciation

The damping each year is constant. This loan simple to calculate can have a tax interest or of treasury, but remains marginal compared to the constant annual installment.

For a sum K borrowed during N years from the rates R refunded annually, damping is worth

$Am=\; \backslash \; frac\; \{K\}\; \{N\}$

The interests for the year I (one starts with year 1) are worth

$I\_i=r\; \backslash \; frac\; \{K\; (n-i+1)\}\{N\}$

The annual installment has is determined by the formula:

$A\_i=A\_1-\; (K*\; \backslash \; frac\; \{R\}\; \{N\})\; *i$

Each year, the interests decrease like a arithmetic Suite of reason $-r\; \backslash \; frac\; \{K\}\; \{N\}$ and of first term $\{K\}\; \backslash \; cdot\; \{R\}$.

The annual installments also decrease like a arithmetic Suite of the same reason but of first term $\{K\}\; \backslash \; cdot\; \{R\}\; +Am$

The undivided loan with constant annual installment

This loan is very current for the households and companies. It is easier to develop the level of risk undergone by the financial institution when the sum paid by the borrower is constant.

Calculation of the annual installment:

$A=\; \backslash \; frac\; \{K.r\}\; \{1\; (1+r)\; ^\; \{-\; N\}\}$

With has the annual installment, K the lent capital, R interest rate, N the full number of annual installments.

This formula is obtained by calculating the Current value of a temporary Rente of constant flow.

The calculation of damping results from the annual installment. One notes $\{Am\}\; \_\; \{I\}$ damping at year I, $\{K\}\; \_\; \{I\}$ the capital due to year I, $\{I\}\; \_\; \{I\}$ the interests on the capital.

$\{Am\}\; \_\; \{I\}\; =\; A-I\_\; \{I\}\; =\; Ar\; \{K\}\; \_\; \{i-1\}$

$Am\_\; \{i+1\}\; =\; A-I\_\; \{i+1\}\; =\; A-rK\_\; \{I\}\; =A-r\; \backslash \; left\; (\backslash \; right)\; =\; \backslash \; left\; (Ar\; \{K\_\; \{i-1\}\}\; \backslash \; right)\; +rAm\_i=\; \{Am\}\; \_\; \{I\}\; +rAm\_i$

$Am\_\; \{i+1\}\; =\; \backslash \; left\; (1+r\; \backslash \; right)\; \{Am\}\; \_\; \{I\}$

Depreciation is a geometrical Suite of reason 1+r and first term $\{Am\}\; \_\; \{1\}\; =\; A-I\_\; \{1\}\; =\; \backslash \; frac\; \{K.r\}\; \{1\; (1+r)\; ^\; \{-\; N\}\}\; -\; R\; \{K\}\; =\; \backslash \; frac\; \{K.r\}\; \{(1+r)\; ^\; \{N\}\; -\; 1\}$. So it grows with time.

The interests are decreasing.

Accounting of the undivided loans

For the companies (except the finance companies) the loan is a passive n the other hand to record with the credit contribution in bank.

At the limit an interest is to be noted.

In France (contrary to the international standards), the bank charge can be included in an account of regularization and transfer then distributed over one duration to the maximum of the loan.

With the fence of the exercise, an interest receivable is noted to represent the latent impoverishment of the interest to pay at the next limit.

Guarantees of the undivided loans

The guarantees are “personal” like the Cautionnement or “real”, i.e. dependant on a value like a Hypothèque on a Immeuble, obligations, Warrant S or credits (Escompte).

(personal such as guarantee or real such as hypothecation, pledge or mortgage according to the nature of the good).

Characteristics of the debentures

The debentures are loans which are born from the emission of obligations which are distributed between many lenders. They are thus loans reserved for the important companies because confidence in the transmitting company is fundamental.

• the damping is the refunding of the capital without taking into account the loads of interest. It represents the number of redeemed bonds of the period ( NR ) by the face value of the obligation ( C ).

• the interest is the bonded debt remaining to be paid at the beginning of period by interest rate.

• the annual installment (or monthly payment , quarterly installment, etc) is the sum withdrawn periodically for the refunding and the load of interest.

Annual installment = damping of the obligations+ interests

Methods of refunding

We find the three formulas: refunding in fine , straight-line depreciation (even portion of capital refunded each year) or constant annual installment (even annual installment each year).

The credit in fine

The interest is regulated with the first constant annual installments.

The capital is refunded either in once after the payment of the interests, or with the following annual installments.

The debenture with straight-line depreciations

The damping each year is constant. The formulas explained in the section undivided straight-line depreciation can be applied with certain characteristics.

Periodic damping Am of the loan is determined by the formula (same symbols):

$Am\_1=N\_1*C=\; \backslash \; frac\; \{K\_0\}\; \{N\}$

The debenture with constant annual installments

The formulas explained in the section undivided constant annual installments can be applied with certain characteristics.

The damping of period 1:

$Am\_1=\; \backslash \; frac\; \{N\_0*\; (1+r)\}\{(1+r^\; \{I\})\}$

With NR many obligations at a given time.

Accounting of the debentures

The debenture has like characteristic important to sometimes impose a discount (issue price minus value of refunding) in addition to the observation of the loan.

It is normally necessary to note two writings different at the date from subscription and the date from release, which separates the observation from the discount and the observation of the commissions. To simplify we will record as follows:

At the limit an interest is to be noted as for the undivided loans.

In France (contrary to the international standards), the bank charge can be included in an account of regularization and transfer then distributed over one duration to the maximum of the loan.

With the fence of the exercise, an interest receivable is noted to represent the latent impoverishment of the interest to pay at the next limit.

With the end of the financial year, the discount must be deadened and registered in load.

The convertibility of the debentures

The debentures can be accompanied with clause allowing conversion into other actions or obligations. Conversion must be envisaged at the origin of the contract. It is fixed by the extraordinary general assembly. The possibility of nonconversion must be envisaged (except in the case of the redeemable bonds in action). In the event of balance, it must be checked by the Auditor.

there exist loans with windows atfixed rate, of which the periods have options of exits. The penalties of exits are decreasing.

Financial analysis: Criteria of debt

• credit-worthiness.

• the ratio of capitalization.

to judge debt of a company, the banks often base on the ratio Stockholders' equity Dettes/ (D/CP) of the company. The acceptable level of D/CP of a company varies according to the Rentabilité of its activity.

to illustrate, a ratio of 1 will be considered to be important in a not very profitable but weak branch of industry in a very profitable branch of industry. Indeed, the profitability of the branch of industry acts directly on the capacity of the company to refund its debt. One should not lose sight of the fact only the level of debt of the company directly influences the level of Charge S financial which it supports by the company.

• the ratio of financial autonomy.

See too

• Trust deed
• Credit
• Standard of bank credits

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