Is a loan a reasonable solution for overcoming the difficulties of a crisis?


National crisis response measures are a great help to many companies all over Estonia, but more and more companies still face a problem where they do not qualify for grants due to the size of the company, business prospects in the coming months, or other business specifics.

Many banks offer business loans to overcome difficulties, but the risks should be carefully considered before taking a loan, so as not to find oneself in an even more difficult situation after six months.

‘The crisis has forced many companies to rethink their business models to create added value for keeping their businesses alive and find new sales opportunities. Such changes are usually associated with risks and there is no certainty that they will bring the expected return,’ says Rauno Klettenberg, CEO of Holm Bank AS, who recommends assessing the reasonableness of the loan as an aid measure on the basis of the purpose for which the loan is taken:

  1. Is a loan needed for a larger investment that will allow the business to be re-profiled or to acquire additional resources to make the existing business work better? Business loans for such purposes make up most of the loans granted to small businesses. Small businesses promote their business with credit in different ways – for example, a repair company can provide the team with better and more reliable tools with the help of a loan, or the bakery can buy a new oven to expand its product range.
  2. Does the loan help to make a purchase for a specific purpose, for example, to procure goods for which there is a demand and by selling which the company can generate new turnover? In this case, the most reasonable solution is a working capital loan. For example, a working capital loan may be suitable for a company that sells sporting goods and wants to buy a summer collection with the help of a loan, which will allow it to be active throughout the coming season.
  3. Is the loan needed to cover fluctuating cash flows over a short period of time? In this case, Holm usually offers companies a limit loan, which acts as an overdraft. This gives the entrepreneur much more flexibility in using the money – they can obtain the goods or equipment necessary for the activity at the time they need it and react quickly to favourable opportunities without having to start negotiations with the bank every time.
  4. Is a loan needed to cover fixed costs, such as labour costs? If a company has drastically reduced its sales due to the market situation, as is currently the case, for example, in the tourism sector, then it is worth seriously considering whether borrowing is the most appropriate solution. Adapting to new circumstances may require fundamental restructuring and painful decisions, which are only postponed and complicated by taking a loan. However, according to Klettenberg, each company is unique, which is why Holm analyses each case very thoroughly and in detail. If the current business, financial background, business relationships with partners, knowledge and skills, industry trends, and even the personal qualities of the manager give reason to believe that after a certain waiting period, normal business will be restored, and if the company shows its willingness to reduce its costs and make every effort to survive, the bank can still support the client’s business.
  5. Is a loan needed to pay off other obligations to creditors? In this situation, borrowing is probably a very bad idea, as it does not create value that will allow you to earn money again in the future. In this situation, it is best to try to find solutions through negotiations with the creditor.

According to Klettenberg, the most sensible financing solution is when the company’s representative is ready to introduce the situation of the company to the bank as openly as possible and does not try to hide its risks from the bank for fear of receiving a negative decision. ’Our primary interest is to help our clients overcome difficulties and get the business back on track, while protecting them from additional risks – we can only do this if there is mutual trust in the relationship with the client,’ he affirmed.