According to Aron Jäger, B2B Financing Business Manager at Holm Bank, small businesses have not lost interest in tackling larger-scale investment projects despite the current difficult economic conditions. In order to encourage companies to implement development projects with a longer payback period, Holm offers companies a loan secured by real estate, i.e. a mortgage loan, with a more favourable interest rate than a traditional small loan and a repayment period of up to 10 years.
‘A mortgage loan is a sensible solution for small businesses looking to raise money for larger investments in their company’s fixed assets and for whom larger loan payments on a small loan with a traditional repayment period of up to three years may be prohibitive,’ said Aron Jäger.
According to him, for example, the purchasing of production equipment or other machinery or the purchasing of land necessary for the expansion of one’s business are investments aimed at increasing the company’s value in the long run, with the recouping of the investment taking five years or even longer.
‘In general, entrepreneurs have developed a comprehensive business plan for such long-term development projects, they have sufficient faith in its success, and they are ready to pledge their assets as collateral. We support the implementation of such projects and offer a longer payment period as well as a lower interest rate than in the case of traditional small loans,’ explained Holm’s representative.
A mortgage loan is not always a suitable solution
A longer repayment period and the resulting significantly lower loan payment can give the impression that a mortgage loan is always the best solution for financing projects. However, according to the B2B Financing Business Manager at Holm Bank, this is not the case.
‘For example, it is not wise to use mortgage loans to purchase seasonal goods or other stocks that do not increase the value of the company in the long run and that the company is planning to sell in just a few months. A real estate loan is also not a good choice in a situation where money is needed to cover extraordinary gaps in turnover. In such a case, it would be better, for example, to take a limit loan, which could, in the case of a longer-term loan agreement, be repaid immediately when the necessary funds become available, thus keeping loan payments low,’ Jäger explained.
According to him, the financing of rapidly recouped short-term investments with a real estate loan is also a bad idea because setting up a mortgage requires more time to make the necessary preparations and is also accompanied by higher one-time costs – you have to order a valuation report and perform notarial procedures to establish a mortgage. Therefore, it is primarily worth using this type of loan to finance larger and longer-term projects.
Mortgage instead of or in addition to a surety
According to Holm’s representative, a mortgage loan is also suitable for those small businesses where the owner wishes to keep reserves in the company to the maximum extent possible and whose monthly salary is therefore too low to receive a small loan secured by a surety.
‘If we sit down and discuss different financing scenarios with the loan applicant and see that the purpose of the investment project, the sustainability of the company’s operations, and the manager’s background give us reason to believe that the company is capable of coping with the debt, then a loan – secured by the company’s or the owner’s personal real estate – can be taken for the portion of the capital needs not covered by a surety,’ he said.
If real estate is already serving as collateral for a loan
Holm’s mortgage loan is secured by real estate belonging to the company or a person directly involved in the company’s business, including land, arable land, forest, or a registered immovable with another intended use.
Unlike many of the big banks, which are only prepared to issue loans secured by unpledged real estate, Holm’s clients can also use real estate already pledged to another bank as collateral. However, this is only the case if the real estate has sufficient free collateral value to establish a next-ranking mortgage, as confirmed by the valuation report.
‘As the company does not repay the loan through the realisation of the mortgage, but instead with the cash flow generated from its business, the prerequisite for accepting the mortgage is, of course, that the company’s current economic activity is sustainable and the company manager’s credit rating shows sufficient solvency and proper previous financial behaviour,’ said Holm’s representative.
According to him, a mortgage secured by real estate does not mean that the bank restricts the company’s creditworthiness to only a mortgage loan. ‘All loan applications are reviewed separately, with the most optimal solution being presented – be it a limit loan suitable for purchasing a stock of goods or a mortgage loan taken for the renovation of production buildings. Real estate as collateral for a loan is only one of the ways in which we can offer more flexible solutions to our customers,’ he added.