Things to bear in mind before taking out a business loan
The goal of a company is to run a profitable business. This profit can then be re-invested, saved as a buffer for leaner days, or used to pay dividends to shareholders. It is typically a good idea to ensure that there are sufficient liquid funds available to the company. Perhaps these are saved up in a bank account, or in assets that can quickly be converted into cash. Good liquidity means that the company has enough money in its accounts to manage its day-to-day business. This money enables the company to pay their invoices, rent, wages and taxes, for example. In short, liquidity means security. It also means that the company has a greater freedom to make good deals when an opportunity presents itself, like a wise investment or the ability to accept a large assignment.
A shortage of liquidity can be expensive. It is good if the company has a buffer to help bridge temporary gaps in revenue, or to shore up a good deal. Sometimes, there are not enough liquid funds in the company. This does not have to mean that the company is performing poorly or is mismanaged. It can just as well mean that the business is doing well, but that the customers quite simply haven’t had time to pay their invoices yet.
Tips for those thinking about a business loan
Many business owners believe that it is a bad thing if their company is considering taking out a business loan. This does not have to a sign of weakness. It can just as likely be because the company is doing well. A loan can, for example, be needed in order to accept a large assignment, for which the company would have to purchase a large amount of material or goods, or to bring on additional workers for a short period. A temporary spike in demand can mean that the company has to stockpile larger inventory than usual, while an opportunity to use a temporary discount from suppliers will allow the company to operate with better profitability in the long run. Growing companies often need to borrow money in order to continue to grow. At the same time, there are a few questions that are good to think about before signing for a loan. Here are some things you should think about before taking out a business loan.
Conduct a risk analysis
Borrowing money costs money. Carefully consider your opportunities and what risks are entailed in financing a business decision with borrowed money. For example, if the company needs to borrow SEK 100,000 for three months, it will be easy to find out what this will cost. You will receive an offer that specifies the cost (the fee or the interest rate), and the conditions that apply, from your lender. It is always up to the business owner to decide if the loan will be a profitable decision or sufficiently important to the business to justify the cost. Will the borrowed funds provide the business with enough opportunities to justify increased costs for a while, or is it perhaps better to let the business grow at its own rate?
Prepare for your loan application
There are many things to think about before you apply for a loan. Try to be as well-prepared as possible. Unfortunately, there are lenders on the market that exploit companies and individuals who have found themselves in a tight spot. By preparing and having a clear plan, it is easier to avoid getting into onerous and disadvantageous credit agreements. Will it cost anything to apply for a loan? Is the request binding? What funds do you need and why? How are you going to use the money? What can you afford? For how long will you need the money, and when will you be debt-free again? How much extra costs can the company afford every month? Will you be repaying a little at a time, or will you pay everything back at once? All of these questions determine what sort of loan you should get.
Look into your options
Be thorough when researching which lender is suitable for the specific kind of loan that you need. You can often get yourself an overview by visiting the websites of lenders and looking at what sort of loans they offer. Different lenders When you have found a couple of lenders that you think will suit you, compare their offers. Also, try to form an idea of what their previous customers are saying: are they satisfied, or is this a lender that frequently finds itself in hot water?
What the lender is thinking
Lending money to someone is always a risk. Every lender wants to minimise the risk of losing their money.
“Lending money to someone is always a risk. Every lender wants to minimise the risk of losing their money."
For that reason, they will always make an assessment of the risk that a business won’t manage to pay back a business loan as planned. They will always ask how the money will be used, how long you will need it for, what your business idea is, if the company is profitable and if there is anything in the foreseeable future that may increase the risk of the loan. They may also make an assessment of how well the company is doing in comparison to its competitors, and if the business has the ability to use the money in a way which will benefit its development over time. The probability that you will be granted a loan is always higher if the business leadership inspires confidence and can show that their business idea is successful and profitable, that the accounts are well-organised and that there are financial reports showing how the business is doing - and how it will develop in the future.
Credit reports
A lender always examines the ability to pay of its customers, whether the customer is a private individual or a business. This assessment can be made in different ways, but the most common approach is to request a credit report to find out whether there are any records of non-payment or other events in the past that affect the business’ credit worthiness. In Sweden, the major banks collaborate and provide the joint service Upplysningscentralen (UC, or Information Centre). UC provides most of the credit reports in Sweden - but there are others on the market who provide similar services, such as CreditSafe.
All credit reports are registered. In many cases, these requests will also show up on future credit reports. In other words, anyone who requests a new credit report will also receive a history of who has requested a credit report, and when. In some cases, especially for private individuals, if a large number of credit reports have been requested in the past, this has a negative impact on that person’s credit worthiness. As it is more common for businesses to use external lenders, it is also natural that there are more credit reports registered to a business. Different lenders have different agreements with the companies who provide credit reports. If you want to be sure about the conditions that apply, always ask about this before submitting your loan application.
Read the terms carefully
Borrowers often don’t read the terms of the credit agreement very carefully before they sign. As a private individual, you are covered by the Consumer Credit Act. This means that you always have a 14-day right of withdrawal when you have signed for a loan (of course, in that case, you must repay the money). The Consumer Credit Act does not apply to companies. Companies do not have a right of withdrawal. Remember to always check the terms and conditions so that the lender cannot change the terms of the loan during the loan period, which might enable them to charge higher fees or require larger repayments than you previously agreed. Another tip is to find out what happens if you were to miss a repayment or if the lender wishes to cancel the credit, or if the borrower wants to repay the loan earlier than planned. Read the terms and conditions carefully. If you find it difficult to interpret what the conditions mean in practice, ask someone for help.
If something goes wrong
No matter how much you prepare, it is always possible that something goes wrong. Perhaps a customer becomes insolvent, a pandemic breaks out, or an important employee falls ill for a long time. There can always arise unpredictable situations that cause problems for the company. Such situations may cause the company to have temporary or longer-term payment difficulties. If you do not pay your fees, interest or repayments in time, the lender will be in touch. Usually, the company is given a period of time to solve the situation. This can often become expensive, very quickly. If a lender terminates a loan, the business can find itself in a difficult place. At the same, the lender needs to ensure that they will get their money back. The conditions specify how and when a loan may be terminated.
Collateral and credit guarantees
Most business loans are tied to some sort of collateral. A collateral can be a fixed or current asset. Another way to increase the lender’s confidence is if a person gives a personal credit guarantee. This means that the guarantor accepts the responsibility to pay the loan, if the company is unable to meet their obligations under the loan agreement.
Business loans provide both opportunities and risks
There is nothing weird about business loans. It’s a way for many businesses to quickly, and with minimal effort, give themselves flexibility and room to manoeuvre. It can be a way to get through temporary downturns or to increase the rate of growth. There are many situations where banks are not sufficiently quick or quite simply not interested in helping out. For that reason, business loans are a well-established form of credit with many different lenders competing with each other for your custom. This creates room for you to negotiate, and results in more solution-oriented lenders who want to find a good solution for every company.
