Investment loan for enterprises – what does it consist of?
Although loans usually advertise themselves with no designated purpose, an investment loan works a little differently. Entities that want to finance an investment provide funds with an indication of that specific purpose. It is predetermined by the entrepreneur who takes out the loan, and often detailed in the contract.
With expediency, lending institutions have the ability to estimate the probability of a return on investment in more detail. This, in turn, makes them able to offer borrowers better terms – lower interest rates, longer repayment periods or a delayed first installment.
Under the loan agreement, the entrepreneur undertakes to spend the funds received on the designated investment, and the financing provider requires documentation of how the money was used. The agreement between the parties should indicate the exact terms of the financing. The term, the distribution of funds, as well as contractual penalties in case the borrower fails to comply with the terms of the agreement are important.
Set an investment goal before taking a loan
A company that decides to take out an investment loan must have a stated purpose for the financing. This can be the enlargement, restoration or modernization of fixed assets. Under these terms are usually:
- Purchase of fixed assets, including new machinery, equipment, computers, vehicles and other fixed assets.
- Modernization – such as production lines, management systems or storage of goods,
- Purchase, renovation or expansion of real estate – offices, warehouses, production halls,
- Launching new products,
- Improving current offerings,
- Implementation of new technologies,
- Employee training.
Before deciding on a lending institution, make sure that the lender supports your company’s chosen investment goal. Remember, too, that the more difficult it is to demonstrate a correlation between planned expenses and return on investment, the more difficult it will be to obtain financing.
What is a business investment loan and what is an investment loan?
Since under a loan, an entrepreneur obtains financing for a specific investment, how is this solution different from a loan from a bank?
Legal basis
Investment loans – like all other loans – are governed by the Banking Law, as well as the Civil Code and the Consumer Credit Act. Only the latter two pieces of legislation apply to loans.
Who provides the financing?
A loan is granted only by banks or SKOKs, a loan can be granted by an entity specializing in loans, a bank, a company or even an individual. Banks, loan companies, but also loan and guarantee funds specialize in loans for investment purposes. They often obtain funds from government and EU programs aimed precisely at supporting the development of entrepreneurship.
Many investment loans are offered to businesses operating in a specific area – for example, a particular province. Loans offered by private companies specializing in lending are not subject to similar restrictions.
Purposefulness
Practice shows that loans are almost always granted with a specific purpose in mind. A loan for investment is no exception. Banks have the tools to control how the borrower has used the funds obtained, and failure to comply with the terms of the agreement risks immediate termination and financial penalties.
Loans are usually granted for any purpose, but an investment loan is an exception to this rule.
Subject of the contract
A loan agreement always involves money. A loan agreement, on the other hand, is not necessarily about money – you can also borrow things. In the case of a loan for investment, however, lending things does not make sense – in the vast majority of cases, entrepreneurs can gain funds for the purchase of a needed item – for example, a machine or vehicle, or the implementation of a key system.
Cost of credit and loan
This is a broad topic. A loan is often characterized by a more favorable interest rate compared to a loan. However, the terms of financing vary widely and depend on the financing institution, repayment period, purpose, amount disbursed and many other factors.
It is worth remembering that a loan always costs money – in the loan agreement you will find fees for providing financing, i.e. interest, commissions and additional costs. A loan, on the other hand, can be provided free of charge – although this is more the case with loans provided by individuals.
In the case of financing with investment in mind, standard costs should be expected. It is important to note that EU loans for companies (i.e., subsidized by the European Union) often offer preferential terms – low interest rates and sometimes an exceptionally long repayment period.
Funding process
To take out a loan, you have to set yourself up for the fact that the process usually takes a long time, is complicated and requires providing detailed documentation. Lenders analyze the credit history of entrepreneurs, check them in databases(BIK, BIG InfoMonitor, KRD), not infrequently conduct an analysis of the financial situation of the company to which they are to provide financing.
The loan process is usually much shorter and simpler – so that the entity using the financing can access the funds as quickly as possible. In the case of an investment loan, the process can get a bit longer, but it still takes less time than a loan.
Contract and repayment
Both the loan agreement and the loan agreement must be in writing. This requirement does not apply only to a loan agreement if the borrowed funds or items do not exceed the value of PLN 1,000. A loan is usually repaid in monthly installments. Loans – depending on the arrangement. Some lenders require repayment in installments, others allow one-time repayment – on the last day of the contract at the latest.
When is it a good idea to use loan financing for investments?
A loan can be a good solution if your business has not obtained financing from a bank or your current financing has proved insufficient. In other words: it can be a beneficial supplement to bank financing for your business. Many private lending institutions offer affordable prerequisites, so it happens that businesses rejected by banks (for example, due to insufficient creditworthiness) can receive financing.
New companies are also eagerly reaching for loans. At banks, it is very often necessary to submit a loan application and accompany it with historical data going back many months. This makes it very difficult to obtain an investment loan for new companies or businesses with short tenure. Compared to a loan, the number of documents that need to be provided is small, and the process is faster.
A loan for investment is a good solution for small and medium-sized businesses that have a specific plan for growth. A convincing presentation of company goals and adequate collateral for the amount needed are often enough to obtain financing.
Investment loan – acceptable collateral
The amount of loan your company can obtain depends on a number of factors, but the key one is often the value of the collateral. The final amount of financing is usually a set percentage of the collateral value.
It is real estate that is most often used as collateral for a loan agreement. When looking for a company where you want to take out a loan, pay attention to what properties it allows as collateral, and which types are on the exclusion list. As a rule, exclusions include historic buildings, as well as unusual ones – in a word: those that can cause difficulties in a possible sale.
Remember that not only real estate can provide collateral. In some cases, the lender may offer collateral in the form of a surety, a pledge or a block of funds in a bank account.
Summary
An investment loan is a worthwhile alternative or supplement to investment loans. It is often used by SME companies that have difficulty obtaining a loan or already have financing from a bank, and now need additional funds that they can quickly access.
So if your company has a specific development plan, but does not currently have the funds to put it into action – an investment loan may be the right solution.
