Business loans to small-sized enterprises. Read this!
Most owners of small businesses have the experience sooner or later that there is too little money in the company account. Sometimes, this is an indication that all is not well with the business, but often it is a temporary situation that has unintentionally arisen. Small thriving businesses with good profitability and growth can also have problems with liquidity. Costs for manufacturing, stocks, personnel and marketing are often incurred before earnings are paid in to the company’s account. If there is insufficient money available, the business owner may have to refrain from a good business transaction, postpone a profitable investment or miss a deadline in an important project.
Insufficient liquidity can have serious consequences
Insufficient liquidity can cause problems for the company; in the worst case, the company may not have sufficient money to pay a large invoice that falls due, staff wages or an important tax payment. This can have disastrous consequences such as a record of non-payment and, in the worst case, bankruptcy. In this situation, it can be a sensible decision to consider a business loan, both as a sole proprietorship and a small limited company. A temporary solution to get through a challenging period for the company.
Give careful consideration to taking a fast business loan
Credits are a necessary part of business. Access to money enables companies to do deals, it creates both freedom of action and scope for it. At the same time, it is important to be aware of the risks, in particular, if you are running a sole proprietorship or a close company. You will then often have to provide collateral for the loan yourself.
Financing for small-sized businesses
The credit market is tightly regulated and lenders don’t like risks. Legislation is moreover mainly designed for larger companies. This can make it difficult to find financing if you have started a new company or run a sole proprietorship or a small close company. If your company does not have any collateral of its own that guarantees that a lender will get their money back, you will most often as owner of the business have to take the risk personally. This may happen, for example, by giving a personal guarantee or mortgaging a property you own.
Loans to sole proprietorships
The company form sole proprietorship is frequently used for newly started small businesses. This is a corporate form which is designed to be easy to operate. At the same time, you and the company are the same legal entity, which is part of your private finances. This means that if you raise a loan for your business, that it is a private loan. This is your own private economy, you will pay the interest and amortization yourself and your private assets will be used as collateral for the loan.
Loans for trading partnerships and limited partnerships
Trading partnerships and limited partnerships are two other corporate forms, where one or more people must take personal responsibility for the company’s finances. In a trading partnership, all partners share responsibility. In a limited partnership, at least one of the owners must be responsible for the business’s debts.
Loans to a limited company
The most common corporate form for somewhat larger businesses is the limited company. The limited company is a legal entity in its own right. When you start a limited company, you invest share capital in the company, currently SEK 25,000.. The share capital is the only amount that you risk personally if the company goes bankrupt. The limited company may, unlike a sole proprietorship, be a lender directly from a borrower. The limited company can also have its own collateral, that can be used when raising loans, such as stocks. properties or other assets. If the limited company does not have sufficiently strong finances, or assets to use as collateral, the lender may request some other type of security. It is therefore quite common that one or more people need to act as guarantors even when the loan is made to a limited company. Another alternative is to raise a loan on a private property, a car or other property.
Business loan without collateral
In order for a lender to be able to lend money to you, they need to make an assessment of your or your company’s finances and payment ability. In the case of a private person, the lender will investigate your income, debts, assets and whether you have previously had sound finances. The same applies for companies. The lender will then investigate whether the company is profitable and has sound finances. What does the income statement and balance sheet look like, has the company a good payment record and are there assets that can be seized if debts are not repaid as planned. A loan without collateral is normally more expensive than a loan with collateral. On the other hand, the debt is not associated with a specific property.
Bear this in mind when you borrow money for your company
- Make a proper calculation and think about whether you really need to borrow money and for what. There is a big difference between you only wanting to borrow a small amount of money acutely for a short period or if you plan to borrow for a large long-term investment.
- Hasty decisions are often expensive. How quickly do you really need the money. Try to give yourself time to think through the situation thoroughly and see what alternatives you have.
- A loan is a loan and shall always be paid back, in instalments through amortization or as a lump sum at the end of the term of the loan. How will that affect your company’s finances in the future?
- Will you need to provide collateral, is there anything in the company or will you have to use a private asset? It may create stress and anxiety if you, for example, use your home or second home to solve a crisis in the business. Think through the situation carefully.
- What are the conditions for the loan, will you, for example, pay interest or a fixed fee. Read through the conditions carefully so that you don’t have any unpleasant surprises.
Financing solutions for small-sized companies
It can be difficult to convince the bank to lend money to a small and perhaps newly-started business. Banks are strictly supervised by the Swedish financial supervisory authority, Finansinspektionen, which often makes them cautious and prefer to avoid large risks. At the same time, there are other types of credit solutions to choose from, which are appropriate for somewhat different situations and purposes. The following section lists the forms of finance that sole proprietors, trading partnerships and limited partnerships can make use of:
Business loans
A business loan is often a short-term loan with a set interest rate or fixed fee. It is often simple to apply for, you will receive a swift response and often have the money in your account in a couple of days. You will most often need some kind of collateral and in certain cases you can, for example, use accounts receivable as collateral. Business loans are more expensive than ordinary bank loans but are on the other hand faster and more convenient with a fixed fee and short term. There are many loan institutes that offer business loans. It is a good idea to make a thorough survey before reaching a decision. Check different rating pages and see what others think, and read through the conditions carefully. You can also use various pages making comparisons to see what the various players are offering you.
Bank loans
You can always go to the bank and ask for a business loan, with or without collateral. A bank loan is often better if you are planning a long-term investment in, for example, machinery or properties. If you are the owner of a small business, the bank will often make a thorough credit assessment of both the company and your own finances before entering into a loan agreement. You will also agree on a set rate of interest and an amortization plan.
Overdraft facility
An overdraft facility means that you have access to working capital when you need it. The credit is short term and you will only pay interest when you use the credit. The size of the credit is determined by the financial situation of your business, the larger your business is, the greater amount of credit can be granted. The overdraft facility is a common solution for both small and large businesses which need additional access to liquid funds for certain periods. It frequently happens that one becomes accustomed to having the additional money in the account and using the credit the whole time. This means that you are always paying interest on your working capital, which is not a good long-term solution.
Borrow money with or without UC
Every time you apply for a loan, the creditor will obtain a credit rating for your company and for you personally, most often through the banks’ joint credit rating institute Upplysningscentralen (UC). All credit enquiries are then visible in your record, and can affect your creditworthiness. It can therefore be a good idea to think through one’s choices carefully and talk to someone with good insight into the loan market.
