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Why 7 years for professional financing in France?

The duration of professional financing in France is often fixed at 7 years, a practice that arouses curiosity and raises several questions. Is this a simple custom, a legacy of religious symbolism, or are there other reasons? How does this duration compare with practices in other European countries? In this article, we explore in greater detail the origins of this rule and its relevance in the European context.

The 7-year term: between usage and religious symbolism

a) Banking and financial use

The 7-year term for business financing in France is largely the result of well-established practice in the banking and financial sector. This duration corresponds to a balance between the financing needs of companies and risk management for financial institutions.

Indeed, banks and other financial institutions seek to limit the risks involved in granting long-term loans, since the longer a loan is granted, the more likely it is to be affected by economic changes or borrower default. The 7-year term is therefore a compromise that enables companies to obtain sufficient financing for their development, while limiting lenders' exposure to risk.

b) The religious symbolism of the number 7

It's hard to completely ignore the religious symbolism of the number 7 in setting this duration for business financing. In the Christian tradition, the number 7 is associated with divine perfection and fulfillment. It is possible that this symbolism played a role, albeit an unconscious one, in setting this duration. For example, in the constitution of the Fifth Republic, the President of the Republic was originally elected for 7 years.

However, it should be emphasized that the 7-year duration is not based solely on this religious symbolism, but rather on a range of factors, including the banking and financial usage mentioned above.

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The duration of professional financing in Europe

a) Practices vary from country to country

The duration of business financing is not systematically the same in all European countries. National legislation, local practices and economic contexts all influence the duration of business financing. For example, in some countries, the duration of financing may be shorter or longer than 7 years, depending on the size of the company, the sector of activity or the type of project financed.

b) Common trends

Despite these differences, it is possible to identify certain common trends in business financing practices across Europe. For example, a 7-year term is frequently used for loans to mid-sized companies, particularly in France's neighboring countries, such as Germany, Spain and Italy.

C) A look at our European neighbors

It's important to note that business financing terms can vary considerably according to loan type, sector of activity and company size. Nevertheless, here's an overview of average business financing terms in some of the major European countries:

  1. Germany: The average term of business financing in Germany is generally between 5 and 8 years, depending on the type of loan and specific conditions.
  2. United Kingdom: In the UK, the average term of business financing generally ranges from 3 to 10 years.
  3. Spain: In Spain, the average term of business financing is between 5 and 7 years, although longer-term loans may be granted for certain real estate or infrastructure projects.
  4. Italy: Business financing in Italy often has an average term of 7 to 10 years, depending on the business sector and company size.
  5. Netherlands: In the Netherlands, the average term of professional financing is between 5 and 10 years.

These trends naturally exclude loans linked to real estate or equipment assets with longer useful lives, which can be used by the bank as collateral for financing.

Impact on company valuation

The 7-year duration of business financing can have a significant impact on the valuation of companies, particularly in the context of the profitability method. Indeed, financial analysts commonly apply a multiple of 5 to 7 times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) to estimate a company's value. This method is based on two important ideas:

  • a company's future profitability can be estimated on the basis of its current profitability
  • The value of a company can be estimated on the basis of its ability to repay the acquisition loan over the credit period, which is often 7 years.

Two limitations of this analysis are immediately apparent:

  • it does not take into account possible changes in economic conditions, competition or technological innovations, which may affect the company's future profitability,
  • the use of a multiple of 7 may be arbitrary and not reflect the economic reality of certain companies.

In conclusion....

The 7-year term for business financing in France is mainly the result of long-established practice in the financial sector, even if the religious symbolism of the number 7 cannot be entirely dismissed. Although this practice is also common in other European countries, it is important to emphasize that financing durations can vary according to national contexts and the specificities of each country.

In the final analysis, the 7-year term for business financing appears to be a compromise that meets both the needs of companies and the risk management imperatives of financial institutions. However, it is essential for companies and lenders to continue to adapt their practices in line with changing economic conditions and the specific features of each market.

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