As the amount of the monthly interest payment for a limit loan depends on the part of the loan that has been used, companies engaging in the smart management of cash flows can – in comparison with a regular business loan – achieve significant interest-related cost savings with a limit loan, explains Aron Jäger, B2B Financing Business Manager at Holm Bank.
According to Jäger, a limit loan is the most reasonable solution for companies with cash flows that fluctuate significantly from month to month.
‘For example, companies often face the problem of how to maintain control of their cash flows when, on the one hand, they have to pay salaries, taxes, and costs associated with leased premises by a certain date each month, while incurring bigger expenditures at least once a quarter within the framework of day-to-day economic activities, such as purchasing a consignment of goods or financing other stocks,’ said Jäger.
Holm’s limit loan with a flexible payment schedule allows you to repay the loan based on how the company is able to realise the inventory purchased with the support of the loan. In order to ensure that the loan burden does not create a gap in the company’s cash flows, Holm offers its clients the opportunity to take a payment holiday through the limit loan for the period during which the company is ordering goods, waiting for them to arrive at the warehouse, organising their sale, or awaiting the receipt of a transfer from its clients by the specified payment deadline. Therefore, the limit loan is also of help to companies, regardless of the field in which they are operating, whose costs fluctuate on a seasonal basis or who need working capital to finance short-term projects and transactions.
According to Aron Jäger, taking a limit loan pays off the most when the company is ready to invest more time and energy in managing its financial affairs than simply paying its monthly fixed costs. He cites the example of a company that includes a limit loan of €10,000 to buy, for example, seasonal goods over a period of three years.
‘In the case of a traditional business loan, the company would have to repay the loan in monthly instalments of around €300. However, if the company takes out a limit loan of €10,000, for example, and uses €8,000 to buy seasonal winter goods in the autumn and after two months it repays €4,000 of what it has earned to the bank, the average loan payment for the first four months would be almost three times lower – limit loan payments consist only of interest payments on the used loan amount,’ he explains.
At the same time, he notes that the amount of a loan payment for a traditional business loan and a limit loan are not comparable indicators – in addition to the interest payment, the monthly payment of a business loan also includes the repayment of the principal, which is not applied in the case of a limit loan. According to him, a limit loan is similar to an overdraft, which the company can use flexibly during the contract period and repay at the end of the contract, either at once or on the basis of a separately agreed upon payment schedule. According to Jäger, the company can also extend the agreement and keep the loan amount in circulation, if it so wishes.
‘The limit loan gives the company the reassurance that until the end of the contract, it has, so to speak, an agreed amount in reserve, which can be used to finance any running costs or projects. However, if the company should need a loan to cover a specific larger investment, such as the purchasing of new machinery/equipment or a major renovation project, and wants to repay it in monthly instalments, a limit loan would not make a difference and it would be worth considering a traditional business loan or a loan secured by real estate,’ says Aron Jäger.
He confirms that Holm’s advisors always consult with their business clients before concluding a contract, helping them to consider different financing alternatives and find a solution that will help them to implement the company’s plans in the most cost-effective and convenient way possible.