Investment loan

What it means

An investment loan is a purpose-bound long-term loan for acquiring a specific asset: a machine, a technology, a building, a production line. It is not drawn freely into the company account but against invoices and contracts, usually straight to the supplier, and the bank checks the purpose.

It differs from a working capital loan in what repays it: an investment loan comes out of what the financed asset earns over years, a working capital line out of turnover within the year. Maturity is therefore set against the life of the asset, not against what the company can still carry each month.

With an investment loan the company owns the asset from day one and the bank only holds a lien over it. Under a lease the leasing company remains the owner until the last instalment. When repayments falter, that is what decides whether the asset is dealt with by enforcing the security or the leasing company simply takes it back.

How it works in practice

The bank asks for an own contribution, a lien over the financed asset and often further security, plus covenants and reporting for the whole life of the loan. The rate is usually a reference rate with a margin, or fixed for an agreed period.

In the books the principal is neither cost nor income; only interest and fees are. Interest up to the moment the asset is brought into use enters the acquisition cost only if the entity decides so, and the asset is then depreciated regardless of how fast the loan is repaid.

The bank often finances only the amount net of VAT. The company pays the tax on the supplier’s invoice from its own cash and gets it back only through the deduction in its VAT return, and on a large investment as an excess deduction that the tax office may check before refunding. We build that gap into the cash flow plan before the loan is signed.

What to watch out for

Covenants are what gets underestimated: a dividend payout or another loan worsens an agreed ratio and the bank may call the entire outstanding balance. A company that budgeted instalments for years suddenly faces the whole principal at once, and has to refinance with a breach already on its record.

Selling or replacing a machine subject to the bank’s lien needs the bank’s consent. A company that sells the old machine without it breaches the loan agreement, the buyer acquires an encumbered asset, and the argument over who repays the bank, and from what, starts only after the deal.