For a new company, financing typically consists of the business owner’s own funds and external financing, such as loans. Lenders generally require collateral to secure the loan.
Access to financing can be a barrier to starting a business, but well-prepared and promising projects usually find funding. Today, companies have more suitable and flexible financing options than ever before.
In Finland, interest rates reflect global trends and are currently more stable than before Finland joined the EU. Although collateral is important, it cannot replace creditworthiness or the company’s ability to meet its obligations. The best “collateral” is the company’s success.
Corporate financing needs and loans
Why does a company need financing?
The amount of capital needed to start a business varies greatly. For example, starting a retail business requires more initial capital than launching a home services company. A retailer must secure premises, acquire stock, invest in marketing and possibly provide guarantees to suppliers for trade receivables or finance the production of goods before actual sales begin.
The costs of starting a new business begin months before income starts flowing. Organisations such as the Federation of Finnish Enterprises and the Confederation of Finnish Industries offer advice on calculating financing needs.
Loan negotiations for companies
Financing negotiations always take time, and details may need to be clarified during the process. If an external guarantor such as Finnvera is involved in securing a bank loan, the decisions proceed step by step. Time is needed not only for preparation but also for the decision-making processes of the various parties involved.
Checklist for loan negotiations
- Latest official financial statements
- Interim financial statements for the current period
- Business idea and business plan
- Trade Register extract
- Potential investment or project plans
Additionally
- Detailed information on collateral
- Minutes from the company’s governing body (if a decision to take a loan and provide collateral has already been made), required at the latest when financing is agreed
Loan negotiations for companies that are starting out
In financing negotiations for a company only starting out, the discussion covers the company’s basic information and operations, financing needs, other sources of funding and collateral. The process moves faster if the business owner can provide the business idea and business plan, financing plan, Trade Register extract and detailed information on collateral in writing. It is advisable to submit these documents to the bank already when scheduling the meeting, so that any additional information requests can be made before the appointment.
Loan negotiations for established companies
When an established company applies for financing, it typically approaches its current bank first. This bank already knows the customer and is familiar with its business operations. If the bank does not yet have the latest official financial statements, they should be provided before the meeting. The negotiations focus on assessing the impact of the planned project on the company’s operations and, most importantly, its ability to meet current and future obligations. After this, the discussions turn to the loan details and collateral.
Loan repayment methods
Equal amortisation: Each instalment includes the same amount of principal. The interest component depends on the remaining balance and the prevailing interest rate.
Annuity: The total payment (principal plus interest) remains the same from one instalment to the next, provided the interest rate does not change.
Fixed equal payments: The repayment remains the same regardless of interest rate fluctuations. If rates rise, the loan term lengthens; if they fall, the loan term shortens.
Bullet loan: The principal is repaid in full at the end of the loan term. Interest is usually paid during the loan term, for example semi-annually.
Interest determination
A loan’s interest rate consists of a reference rate plus a customer-specific margin charged by the bank. The interest can be fixed for the entire loan term (fixed-rate loan), or it can be variable, determined for one interest period at a time. The shortest interest period is typically one month.
Company collateral
Why is collateral needed?
When making a financing decision, a bank looks at the company’s repayment capacity and creditworthiness. Collateral is required to secure repayment if the loan cannot be serviced as agreed. Banks also seek collateral to cover interest and expenses, not just the principal of the loan.
The bank assigns a collateral value, which depends on factors such as how easily the asset can be liquidated, or, in the case of real estate, how suitable the property is for different uses. The starting point is the price that could be obtained in a free-market sale.
General and specific pledges
Shares and real estate may belong to the company or the business owner personally. They may also be pledged by external parties. Collateral may be pledged generally (general pledge), in which case it secures all of the company’s current and future obligations. Alternatively, it may be pledged specifically (specific pledge), covering only one or more designated obligations, and released once these have been repaid.
Other guarantees
Finnvera offers a range of guarantee products. It also guarantees loans for companies starting out and provides financing in the form of equity investments in companies. Loans granted by insurance companies are subject to strict collateral requirements, and a bank guarantee is often used as security. Collateral that does not meet an insurance company’s criteria may still be accepted by a bank, which can then provide a guarantee on behalf of its customer.
Financing options for companies
Promissory note loan
The most common form of financing is a promissory note loan, the standard loan agreement. It is typically used to finance investments such as business premises or the establishment of a company.
Revolving credit facility and overdraft account
A company can agree on the use of revolving credit facility with its bank. Within the agreed limit, the company can draw down loans in instalments and for periods it chooses, usually up to 12 months. In practice, this works like a series of short-term loans, with interest determined for each drawdown period. The credit is repaid as a lump sum at the end of the loan term.
Businesses can also apply for a corporate account with credit facility, also known as an overdraft account. The company can withdraw funds from the account up to the maximum agreed amount. Since the credit facility ties up the bank’s funds, it charges a commitment fee. Both revolving credit and overdraft facility require collateral.
Financing offered by finance companies
Finance companies often provide solutions particularly suitable for working capital needs. Typically, the financed asset itself serves as collateral, allowing other collateral to be reserved for additional financing needs.
Finance companies may also provide financing against the company’s receivables without requiring additional collateral. In this case, the service includes not only financing but also ledger management and debt collection. The most well-known form of this type of financing is factoring, i.e. accounts receivable financing.
For investments such as vehicles, office equipment or machinery, finance companies offer tailored financing arrangements, the most common of which is leasing. With leasing, the company gains immediate use of the asset and pays lease in fixed instalments over a contract term of three to five years. The asset remains the property of the finance company, and the lessee is usually required to provide a down payment. Leasing agreements often also include additional services such as asset accounting or cost monitoring.
Other sources of financing
Direct market financing
Listed companies and other large corporations can raise funds directly from the markets through financial instruments such as shares and bonds, usually with the assistance of investment banks.
Private equity investors
Private equity can come from specialised investment firms or wealthy individuals who invest in unlisted, high-potential growth companies. In addition to capital, private equity investors usually contribute business expertise and take an active role in the company’s development.
Insurance companies
In addition to banks, insurance companies also provide financing to businesses. This is known as relending.
Public sector funding
Many public institutions support entrepreneurship, internationalisation and growth companies through financing, guarantees and equity investments. These include Finnvera, Business Finland, Sitra and regional Centres for Economic Development, Transport and the Environment.
Summary and key terms
A company’s financing may consist of equity, loans, financial institution products, private equity investments and public support schemes. In financing negotiations, the company’s ability to repay and creditworthiness are key, but collateral also plays an essential role: it secures loan repayment. Collateral may include, for example, real estate, shares or guarantees from third parties.
Loan repayment and interest models vary from equal instalments to bullet loans, and from fixed to variable interest rates. The financing method is chosen based on the company’s needs, with options including promissory note loans, credit limits, leasing and factoring. Public actors such as Finnvera offer financing and guarantees especially for companies aiming for growth and internationalisation.
Guarantee: A commitment by which a person undertakes to repay another person’s debt if the borrower is unwilling or unable to repay it.
Pledge: Assets pledged as security for a loan, which the bank may sell if necessary (e.g. housing company shares, bank deposits, real estate).
Reference rate: A variable interest rate based on market conditions to which a loan may be tied instead of a fixed rate. Common reference rates are Euribor and prime rate.
Euribor: The Euro Interbank Offered Rate or Euribor is a benchmark interest rate in the euro area money markets, calculated for different maturities. For example, a loan tied to the 3-month Euribor is reviewed every three months.
Prime rate: A bank-specific reference rate, the level of which is based on expected market rate developments and inflation outlooks.
Margin: The bank-specific markup added to the reference rate. Together, the reference rate and margin form the loan interest rate and provide the bank’s profit.
Equal payments: All loan repayments are equal in size. Over time, the interest portion decreases. This can take the form of an annuity loan, where changes in interest rates affect the instalment amount, or a fixed-payment loan, where interest changes affect the loan term instead.
Equal amortisation: The loan principal is repaid in equal amounts each time. Payments are higher at the beginning due to higher interest, but the interest portion decreases as the principal is reduced.