Updated last 26.03.2021
What is a bank loan?
The bank loan is a deal between the bank and the borrower. The bank is obliged to extend to the borrower a monetary amount for a specific purpose and under agreed terms and conditions and the borrower is obliged to use the funds in accordance with the agreement and to repay this amount upon expiry of the term of the loan. Bank loan agreements are signed in writing and the borrower pays an interest rate on each loan as agreed to with the bank (art. 430, para 1 of the Commerce Act).
Types of loans
The types of loans may be classified depending on:
- Their purpose – Investment credit or credit for turnover funds;
- The settlement period – short-term or long-term credit;
- The level of collateralisation – secured, partially secured or unsecured;
- The manner of allotment- as a lump sum or as credit lines
- The mode of utilisation and repayment, etc.
Most banks in our country publish structured information regarding the different types of business loans depending on the purpose they are extended for.
According to their purpose the loans provided to Small and medium-sized enterprises (SME) fall into two major categories:
Investment loans are available for the acquisition of assets. This includes the purchase or repair of machines, equipment and furnishing, or the so-called tangible assets. Investment loans may also be used to finance the purchase of software, management systems, to patent a specific idea or service, and these are the so-called loans for intangible assets. The creditors require collateral on investment loans to ensure that the loan will be repaid regardless of the financial welfare of the company.
In most cases mortgage or pledge over the tangible or financial assets subject to the transaction is used as collateral.
|Working capital loans|
If you need funds to cover current business needs such as salaries to the employees, purchase of goods, materials, consumables, etc., you may take advantage of the various types of working capital loans. Most banks in our country offer the following working capital loan options:
- Standard loans;
- Credit lines – the credit line represents a credit, which could be utilized within certain term in full or in parts, up to the amount agreed upon between the bank and the client limit. The interest the client is due is payable only on the utilized sum from the credit line, but ordinarily the client also pays other expenses related to the credit line, in connection to the allotment thereof, such as for example fee for engagement of the credit resource, etc. The utilized sums under the credit line are settled and payable depending on the particular agreement between the bank and the client;
- Credit lines for vendors with POS terminals. The POS (Point of Sale/Service) terminal is a device, allowing the vendors to accept payments through debit and/or credit cards. The POS terminal does electronic transfer of funds from the customers’ cards to the vendor’s account;
- Overdraft – the overdraft represents a credit, allotted and transferred by the bank to the client’s payment account, allowing the client to exceed the available funds in the account. The overdraft is settled automatically at receipt of funds in the client’s payment account. The client is entitled to utilize the full agreed amount of the overdraft or a part thereof, paying interest on the utilized part. Ordinarily the interest rate on the used overdraft is higher than the one for consumer credits, since at the latter the utilization and the settlement are scheduled in advance and in most cases they are better secured compared to the overdraft-type credit;
- Revolving / renewable loan – revolving (restorable) credit is the credit, which could be automatically restored at agreed in advance terms and conditions and amount within a certain period. This means that the borrower is able to withdraw, pay back and withdraw again credit up to the stated amount for a fixed time period;
- Agriculture loans against subsidies – credits, allotted in exchange of a pledge of the subsidy for agricultural producers, aided under schemes and measures of the General agricultural policy;
- Loans with preapproved repayment schedule, etc.
How is the interest rate on the loan determined?
Each bank has a methodology for the calculation of the interest rate on the different types of loans. Interest rates on the various types of loans are usually formed based on two major indicators:
- Reference interest rate – a value determined independently from the creditor bank. Each bank maintains current information on the international and national interest rate indexes which it uses to determine the interest rate (for example, EURIBOR, LIBOR, etc.)
- Agreed interest add-on which takes into account the risk that the bank undertakes when extending the loan
This may be simple or compound interest calculated as interest rate over the repayment period of the loan.
The interest rate on the loan also depends on your credit history and the market situation as at the time the transaction is closed. Information regarding the terms and conditions on loans is available on the website of the bank of your preference. More details regarding the market situation concerning interest rates are available here.
|Important to know|
To obtain information regarding the financial instruments that charge preferential interest rates on business loans to SME’s, please, visit the section National Funding Programmes or European Funding Programmes .
Fees charged on the loan
In addition to the various interest rates that each bank sets, financial institutions also charge certain fees related to loans disbursement, such as:
- Fee for application, analysis and assessment of the credit worthiness;
- Fee for the opening, servicing and closing of an account under the loan;
- Loan utilisation fee;
- Fee for fixed conditions when you would not like to utilise the loan immediately after its approval;
- Fee, if you would like to renegotiate the terms and conditions of the loan;
- Fee for review of the renegotiation;
- Loan restructuring fee;
- Early loan repayment fee;
- Fees for the additional services banks offer (e.g., SMS messaging, credit or debit cards).
The interest and all fees due on the loan determine the real cost of the loan that you will get and repay.
Take into consideration that except the stated fees under the credit, in case of delay of payment of the due under the credit installments, the borrower is also due a late penalty interest. Such interest is charged from the date following the maturity date (the date when the installment is due). The interest is charged for the time of the delay. The amount of the penalty late interest is legally set only in relation to the consumer credits (the legal interest, which currently is in the amount of Base Interest Rate of the Bulgarian National Bank + 10 points, shall not be exceeded). In relation to the other credits there is no legal framework for the amount.
The cost of the credit is additionally raised by the expenses, related to the insurance in favor of the banks of the property, serving as a security under the credit.
|Important to know|
Each bank is obliged to state all fees due on the loan.
|For more information|
For more information on bank loans and the related regulatory framework is available on the website of: