Purchase Finance vs. Business Loan: Battle of the Benefits - Who Emerges Victorious?

07 Jun 2023

What is Purchase Finance?

Purchase finance is a type of financing that is particularly created to facilitate the purchase of a particular asset or item & enables lenders or financing companies to make upfront payment to suppliers. This enables the borrower to buy the asset right away while deferring loan repayment for a predetermined amount of time, frequently in the form of recurring installment payments.

Key Differences between Purchase Finance & Business Loan

table of difference between purchase finance & Business loan

Key Benefits of Purchase Finance

Pay as You Go: Purchase Finance allows you to pay only for the amount of loan that you use. Unlike business loans, where interest is charged on the total loan amount from the beginning, here, you only pay interest on the portion of the funds you have used.
Due to the fact that you are not charged interest on the entire loan amount until it has been used up, this pay-as-you-use function may allow for cost savings.
For example – If you avail a loan of Rs. 10,00,000 at an interest rate of 1% per month for 60 days but you repay it in 30 days, then you will only have to pay the interest only for 30 days i.e. Rs. 10,000 instead of Rs. 20,000.

Rotating Credit: It has the benefit of rotating credit, giving you access to a credit limit that has been pre-approved and can be used repeatedly depending on your need. Without having to apply for new loans each time, you can borrow, pay it back, and borrow again up to the credit limit. Due to this flexibility, you will always have easy access to the money you need without having to submit and get approval for numerous loan applications.
For example – If your credit cycle is set at 60 days, then you can borrow Rs. 10,00,000 for 60 days. Once you repay the amount at the end of 60 days, you are eligible to again borrow the same amount of Rs. 10,00,000 for the next 60 days.
As long as you make timely repayments, this cycle continues, allowing you to re-borrow the money within the designated credit cycle.

No Foreclosure Charges: Purchase financing typically does not impose fees or penalties for early repayment. If you opt to pay back a typical business loan early, the lender might impose fees or other penalties. Here, however, you often have the opportunity to repay the borrowed amount whenever you want without paying additional fees. This can be helpful if you have the resources to pay back the loan early or if you want to save money on interest.

Withdrawal as per need: It often provides greater flexibility for withdrawal. It is often set up as a revolving credit facility, enabling firms to withdraw money as needed, subject to a predefined credit limit. This implies that rather than obtaining a big sum upfront like with conventional business loans, you can access the required amount whenever you need it. Businesses that experience fluctuating finance requirements over time or have unforeseen expenses may find this flexibility to be advantageous.

Credit Limits & Credit Lines: One of the most important aspects of purchase finance is the availability of a pre-approved credit limit. This means you have access to a defined amount of credit that you can spend to buy assets or products. The credit limit is established based on criteria such as your creditworthiness and the financials of your organization. Purchase finance allows you to borrow up to your credit limit and return it over time.

Choosing between Purchase Finance and Business Loans for some businesses might be like choosing between buying a custom-tailored suit or renting a one-size-fits-all costume.

Purchase Finance is like that custom-tailored suit that has been specially tailored to fit you while Business Loan is a one-size-fits-all outfit on rent that may fulfill your needs, but it lacks the specialized fit, comfort, and customization that Purchase Finance provides.

To put it simply, purchase finance provides various benefits, including the option to pay as you go, access to a credit limit, no foreclosure charges, and the flexibility to use the funds as working capital. It is a customized financing option that can give businesses the financial flexibility they require to make purchases and successfully manage their cash flow.

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