Many budding entrepreneurs lack the basic capital to start their own business. Yet they have a plan and the best conditions to succeed. Banks offer business loans for just such cases. Are you one of those who want to start a business? Or are you just curious about what types of business loans exist, how they differ from consumer credit and under what conditions they can be obtained? In this article, we take a detailed look at everything you might want to know about business credit.
Are you dealing with a business loan, collateral, surety or a dispute with the bank? Contact us. We will assess the contract, point out risky provisions and suggest a specific course of action.
A business loan is a financial product designed exclusively for entrepreneurs. Its main purpose is to support the development of the business – it may be to finance day-to-day operations, purchase technology, expand into new markets or launch a new project. It is offered both by traditional banks and by non-bank companies that are authorised to provide non-bank loans.
Business loans are an essential financial tool for companies that need funds to expand, operate or overcome temporary financial difficulties. For example, a catering entrepreneur may use a loan to acquire modern kitchen equipment, while a manufacturing company invests in the purchase of machinery to increase production capacity.
Unlike consumer credit, which is intended for individuals to cover personal needs, business credit has a clearly defined purpose – to support business activity.
However, the main difference between business and consumer credit lies not only in the purpose but also in the assessment of creditworthiness and collateral. For a business loan, banks place emphasis on financial statements, tax returns and overall business history.
Taking out a business loan is one thing. It’s another to comply with all the terms and conditions on both sides. If you find yourself in a situation where the bank is threatening to terminate your loan, insolvency, or any other problem related to your business loan, don’t hesitate to contact us for legal advice.
Business loans vary according to their purpose and the terms on which they are granted.
| Type of financing | When it is suitable | Main advantage | What to look out for |
|---|---|---|---|
| Operating loan | inventory, payroll, supplier financing | quickly bridge operational needs | shorter maturity, pressure on cash flow |
| Investment credit | machinery, technology, equipment, real estate | suitable for larger and long-term investments | often higher collateral requirements |
| Overdraft | short-term shortfall of money in the account | high flexibility | higher rates and risk of expensive operation |
| Leasing | cars, machinery, other movable assets | lower need for own money at the beginning | restrictions arising from the contract and ownership of the asset |
| Alternative financing | start-up or riskier projects | possibility to raise money outside the bank | individual and sometimes less favourable terms |
A practical example:
An e-commerce company used an investment loan of CZK 3 million to create an automated warehouse. As a result, the company reduced delivery time from 5 days to 2 days and increased the number of orders by 30% in one year.
When choosing a loan, you also need to pay attention to the types of interest rates. Fixed rates guarantee you stability of repayments. Variable ones may be more advantageous if you want to make a larger repayment in one lump sum, but they also carry more risk.
In addition to interest, banking institutions may traditionally charge administrative fees or other fees for arranging the loan. To get a more specific idea of the payments, you can use a loan calculator that will also help you calculate the APR and include all the costs associated with the loan.
There is also a refinancing option for business loans. This can help you get better terms, such as a lower interest rate, which is of course what everyone is aiming for. The advantage of refinancing is that you will reduce repayment costs and improve cash flow. On the other hand, be aware of any early repayment charges, which could come as a nasty surprise. Again, the loan calculator will help you analyse the offer.
In any case, have your contract checked by a lawyer before signing to avoid unwanted complications. Our experts will detect legal loopholes and warn you of any potential risks.
For example, in Fio banka you can get a loan from CZK 20 million with a maximum repayment period of up to 25 years, the interest rate is variable. Komerční banka can offer you a Profi loan of up to 5 million with an interest rate from 5.9% p.a. Cashbot, for example, specialises in fast processing of short-term loans with flexible terms and no early repayment fees.
Entrepreneurs have to meet several conditions in order to obtain a business loan. They must meet the legal conditions for doing business, including proper registration in the commercial register. Banks often check whether the entrepreneur has fulfilled tax obligations.
The applicant has to submit a tax return to prove the amount of his income and also a business plan mentioning all the important information. He should describe the form of the business, the organization of the business, a detailed description of its services or products and should also attach a financial plan and a timetable.
Then the bank takes into account is the legal form of the applicant. Banks require different documents from legal entities and self-employed persons.
It also depends on the creditworthiness of the applicant. Banks evaluate financial statements, tax returns and business history to verify the applicant’s ability to repay the loan.
Last but not least is the need for collateral for the loan. This is usually a pledge of assets, a third party guarantee or a promissory note.
If you are interested in a business loan more specifically and want a better idea of the possible costs, you can use a loan calculator to help you calculate the repayments and APR. You can find a loan calculator on most banking institution websites.
Ms. Janska contacted us when she wanted to obtain a business loan to open a small beauty studio. She already had a space to rent, basic equipment and an idea of the services offered, but the bank returned her application for completion. According to the bank, the business plan was too general and did not show enough of exactly how the loan would be repaid in the first months of operation.
First, we reviewed with the client what documents she had already prepared and what was missing. We helped her to refine the description of the business plan, complete a realistic financial plan, an overview of expected costs and a collateral proposal. At the same time, we also alerted her to the legal implications of a possible guarantee with private property and to the provisions of the loan documentation, which would be unnecessarily disadvantageous for her.
As a result, Ms Jánská revised her application in a much more convincing manner and entered the negotiations with the bank with a much better idea of what was still acceptable and what was already an unnecessary risk for her.
The legal aspects of business loans can be found mainly in the Civil Code. The basis is always the loan agreement, which contains the rights and obligations of both parties – while the borrower is obliged to repay the loan according to the agreed terms and conditions, the lender must provide the financing in the agreed amount and on the agreed date. Termination of the contract then occurs upon proper repayment, early repayment or breach of terms.
Always have a lawyer check the contract before you sign it so that you don’t bang your head later on when you find out that you have signed very unfavourable terms or agreed to something that the other party did not warn you about.
Mortgages are one of the most common types of credit. Did you know that you can also take out a mortgage on one spouse? Find out under what conditions it pays to have only one spouse on the bank.
Even business loans need to be secured in case the borrower is in a situation where he or she is no longer able to repay the loan. Businesses can most often secure their loan in the following ways.
What it looks like in practice:
If you are a trucking entrepreneur, you can secure your business loan for the purchase of trucks by arranging with the bank just for company cars. If you stop making payments, the bank will activate the lien and sell the trucks at auction. However, you, as the borrower, remain liable for the outstanding portion of the loan that the auction proceeds fail to cover.
As with a consumer loan, a business loan comes with certain risks that you must consider before deciding to take out a loan. The biggest catch may be default. As an entrepreneur, you should definitely have a plan in place in case your income unexpectedly drops. If you are unable to repay your obligations, the bank may initiate insolvency proceedings against you.
Also, make sure you comply with all the terms of your contract. Just a small mistake and you could face early termination and foreclosure by the bank.
Even self-employed workers may find themselves unable to continue their activities and need temporary support from the state. In this article on support for self-employed workers, we have summarised the most important information that you may find useful.
A business loan can help with business start-up, operations and larger investments, but the choice of loan needs to be well thought out. It is important to look not only at the interest rate, but also at the fees, repayment terms, collateral options and the reasons why the bank may cancel the loan.
To obtain a loan, you usually need to provide a business plan, income, financial statements or tax returns. The higher the amount and the harder the collateral, the more attention the contract itself and the risks involved deserve.
Yes, but they usually have to better document the business plan, expected income and repayment method.
A business loan is for business purposes and the bank assesses creditworthiness, purpose and collateral differently.
Not always, but it is common for higher amounts. The bank may want collateral, a guarantor or other security.
Most commonly, tax returns, financial statements, business plan, identifying information and collateral proposal.
Yes, but you need to check the contract to see if there are any fees involved and under what conditions.
On penalties, reasons for redemption, conditions of drawdown, collateral and obligations to the bank during the repayment period.
Especially for larger amounts, property guarantees, personal guarantees or when the terms are unclear or unilaterally unfavourable.
Our team of experienced attorneys will help you solve any legal issue. Within 24 hours we’ll evaluate your situation and suggest a step-by-step solution, including all costs. The price for this proposal is only CZK 690, and this is refunded to you when you order service from us.
Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
In person and online. Just choose the appropriate service or opt for an independent consultation when you are unsure.
