The productive loan belongs to the loans, which – as the name implies – apply to a productive purpose. In essence, companies are making use of productive loans to finance their production.
Types of productive loans
Productive loans thus describe loans to commercial enterprises to finance production. First and foremost, there are two dominant types of productive loans that are awarded and differ in purpose and duration. For one thing, there are so-called investment loans. These loans have a long deadline and are used to finance production facilities.
On the other hand, there are so-called working capital loans. These loans are rather short-term and serve to finance operating resources. Thus, working capital loans finance short-term current assets. The term current assets refers in this context to the circulating assets. This means the money that is needed for the purchase of goods and is tied to the paragraph just this. Working capital loans are thus used to keep production going, by pre-financing the operating resources. These will be liquidated or sold again after completion of the refining or resale.
Differences between productive loans and consumer credit
Much more pronounced than the types of productive loans, productive loans generally differ in comparison to consumer loans. While a productive loan, as I said, is a loan to a business enterprise, the debtor in a consumer loan is a private individual. Furthermore, in the case of a productive loan, the company relinquishes borrowed capital with the idea of using the additional money to generate a multiple of precisely this amount of additional output.
In contrast, consumer credit serves consumption, ie the purchase of goods, which are generally intended for private use and very much lose value. Frequently, for example, consumer loans finance television. Another difficulty with consumer credit compared to productive credit is that the goods or assets acquired with the loan represent directly the security for the loan and thus, if necessary, can be seized in the event of outstanding repayments. Different with consumer credit. Because many goods purchased with consumer loans, such as TVs, dishwashers or washing machines are impoverished, as they are necessary for the leadership of a modest lifestyle. Thus, these things are among the non-attachable things. The only security for the consumer credit bank is the promise of the debtor and his labor. As a result, consumer loans often have significantly worse terms and conditions than productive loans.