Do you want to start a business but lack finance? A business loan can help you

What is a business loan and what is its purpose?

A business loan is a financial product designed exclusively for entrepreneurs. Its main purpose is to support the development of the business – it can be to finance day-to-day operations, purchase technology, expand into new markets or start 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.

What types of business loans are there?

Business loans vary according to their purpose and the terms on which they are granted.

• Operating loans: These are ideal for short-term needs such as purchasing inventory, paying wages or paying suppliers. These loans allow businesses to manage day-to-day operations.
• Investment loans: These are used to finance long-term projects such as the purchase of machinery, technology or real estate. These loans often have longer maturities.
• Overdraft facilities: These allow you to draw down funds even if you have a zero balance in your account. This is a flexible solution, but with higher interest rates.
• Lease financing: This is suitable for the acquisition of movable assets such as cars or machinery. The advantage is that leasing does not require immediate cash.
• Alternative sources of finance: Modern options include crowdlending or venture capital, which offer financing without traditional banking institutions.

Practical example:

An e-commerce company used an investment loan of CZK 3 million to create an automated warehouse. As a result, it reduced delivery time from 5 days to 2 days and increased the number of orders by 30% in one year.

What about interest on business loans?

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. The Civil Code, which allows you to negotiate terms if circumstances change (for example, if rates increase unexpectedly), will help you in any disputes.

In any case, have your contract checked by a lawyer before signing to avoid unwanted complications. Our experts will detect legal loopholes and alert you to potential risks.

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 of 5.9% p.a. Cashbot, for example, specialises in fast processing of short-term loans with flexible terms and no early repayment fees.

Under what conditions can I get a business loan?

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 business, the organization of the company, 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.

What does the law say about business loans?

The legal aspects of business loans would be found mainly in the Civil Code, specifically in Section 2395 et seq. The Pledge Law sets out the rules for securing a claim with a pledge and under the Bills of Exchange and Cheques Law, in turn, specific rules apply if the loan is secured by a promissory note.

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 borrower with financing in the agreed amount and at the agreed time. Termination of the contract then occurs by proper repayment, early repayment or breach of terms.

Always have a lawyer read the contract before you sign it, so that you don’t beat 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.

What can be used to secure a business loan?

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.

• Lien: You can secure your loan with your company’s movable and immovable assets. If a situation arises where you stop repaying the loan, the bank has the right to monetize these assets.
• Guarantor’s statement: In this case, a third party, usually another company, a sole trader or a family member, steps in. This person will undertake to repay the loan if the borrower fails to do so.
• Bank guarantees: These serve as additional security for the lender.

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.

Even business loans are risky

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.

Specific tips for entrepreneurs

• Prepare a business plan: Really pay attention to this phase and do not underestimate it in any way. Banks will appreciate it if you prepare a detailed plan that includes cost and income estimates.
• Check the contract: Read the terms and conditions carefully, especially the interest rate, APR and penalties. Of course, we will be happy to help you check it so that you avoid signing up to unreasonable terms.
• Negotiate: He who does not ask, has nothing. Be sure not to be afraid to ask for better terms, such as lower interest rates. In most cases, there are ways to find a more ideal solution to make the contract work for you.
• Ask for help: Business credit tends to involve really large sums of money, where good preparation and support from experts pays off. Don’t be afraid to contact us, whether you want help evaluating the terms of the contract or you run into repayment problems or other disputes with the bank. We can help you.

Summary

A business loan is a key tool for financing a business, whether it’s to start a business, invest in equipment or provide working capital. There are several types of business loans, from operating and investment loans to overdraft and lease financing. Compared to consumer loans, they differ in purpose, credit rating and collateral options. In order to obtain a loan, you must meet the requirements of the banks, which evaluate tax returns, financial statements and a business plan. Choosing the right loan can help businesses grow, optimise cashflow and gain a competitive advantage.