November is the high season of budgeting and a lot of companies are currently considering their investment needs for the following year and options for getting financing. According to Aron Jäger, Financing Business Manager of Holm Bank, this is the reason for why the number of companies applying for a business loan has significantly increased over the last months.
‘Involving a loan instrument can help businesses that are looking to expand and companies that wish to restructure their activities or change their business model in order to adapt to new economic circumstances,’ the Holm Bank representative said.
To guarantee that the currently insecure entrepreneurship environment will not cause unexpected financial difficulties to companies with a loan burden, Aron Jäger urges applicants to make sure that the following important criteria are met before submitting a loan application.
- Think through the reasons why your company needs a loan.
‘The bank wants to see how a loan can help raise the value of the company, not just what the resources will be spent on. If a company wishes to make a purchase that will in no way increase its capabilities to do more quality work or earn more profit to pay back the loan, then a positive response is rather unlikely,’ Jäger said. He says that most businesses approach Holm Bank with a thought-through business plan that includes a thorough analysis of increasing or expanding the company and maps potential risks. ‘This is a great start to get a positive response for a loan,’ he assured.
- Calculate the exact amount of loan money that your company needs.
According to Aron Jäger, every now and then there are applications from companies who wish to apply for a maximum amount of loan just in case, whereas their actual business plan confirms that only a proportion of the sum is covered. ‘A loan is an obligation and the larger the sum, the larger the interests and, consequently, risks for the loan applicant. The bank needs to see specific indications of prices or offers to confirm that the loan money will be invested for the intended purpose and in a responsible manner, and will not remain on the bank account just in case,’ he added.
- Do not over-invest.
If planning is insufficient, there is a risk of over-investing. ‘There have been occasions where we have had to put a stop to the enthusiasm of companies because the capacities of their investments were not in accordance with their experience and cash flow. Even if the business plan and indicators of previous months support the investment, they may actually be the result of a single transaction, but if the price of a product or service needed to be modified in the future, then their revenue might be lower than the sum of money needed to cover the investment,’ the representative of Holm Bank explained.
He confirmed that in situations like that, they discuss alternative options with clients, for example, executing the project on a smaller scale or considering renting instead of purchasing. ‘There is always the chance that if a business project works well for a while and helps to increase the customer base, the company can go back to the full-scale investment project,’ he added.
- Be prepared to explain which resources you will use to pay back the loan.
Aron Jäger says that in current conditions, it is extremely important for a loan applicant to have a clear vision of how they are going to handle the loan obligation with their current income as well as in an economic recession which could affect their operations. ‘Most companies are careful and able to predict the possible setbacks. Contrary to the general opinion, an open discussion about possible risks does not equal a negative response for a loan – honesty is a rather positive sign in the eyes of the bank, and Holm Bank advisors generally help clients to map possible solutions for risk scenarios,’ Jäger assured.
- Make sure that the image of the company and its leader are trustworthy.
According to the Holm Bank representative, the loan market is based on trust, which is why the bank is obligated to verify that the background of the loan applicant enables future cooperation. ‘The bank lends money for companies that is trusted to us by Estonian, German, and Austrian depositors, and we have a responsibility to guarantee that their trust in us is not violated. For that reason, we not only consider the financial state and behaviour of companies, but also check the background of the company leader before confirming a loan,’ he explained, while adding, ‘If we see that the head of the company is a person with long-time experience in the field, a number of stable business relations, and has honoured their obligations before lenders even in complicated circumstances, then we feel certain that we can put our trust in them for the loan application.’
Aron Jäger says that Holm Bank is always encouraging clients to contact the bank immediately if times get hard and seek for solutions with the lender to overcome the difficulties. ‘If you ignore the problem, it creates a situation where the debt before the bank leaves an unsightly mark in the system of the bank as well as companies that offer credit ratings. Our goal is to avoid that at any cost,’ he confirmed.