We compare the main types of business loans. – What loans can businesses choose from? What are the main differences? How do financiers think?

2020.11.23. 22:49

Applying for a loan can help many companies achieve growth, it helps them develop faster and it also unlocks new opportunities. In contrary to the general opinion, applying for a loan is not only an option when the company is facing financial difficulties, but also when it comes to reaching future goals more easily. In case businesses choose a suitable loan product, they can achieve business successes sooner and can continuously increase the business’ revenue.

Finding your way around the types of loans available in the market is not easy, to assist companies in making a decision, in this article, we summarize the available loan products and compare the most important conditions.

 

LOAN PRODUCTS CURRENTLY AVAILABLE AT HITELPONT:

MFB Crisis Loan

Business Mortgage

MFB Business Financing Investment Loan

MFB Business Financing Working Capital Loan

 

Primarily, we focus on the loan products available for SMEs, micro-sized businesses and entrepreneurs. As Hitelpont has been an active participant in the SME financing market in the past 15 years, with a serious professional background we ensure to support as many domestic businesses as possible through providing business loans.

By choosing the right loan product, businesses can cope with financial difficulties more easily (Source: Javier Allegue Barros, Unsplash)

How to categorize different loan products?

We can examine loan products from several perspectives.

Nature of use

First of all, it is important to define the nature of the possible use, corporate loans can be divided into two major categories depending on the purpose of the loan, whether the loan objective is defined in advance or not. In case the purpose of the loan is decided, the amount can only be used to cover the costs related to the loan purpose. In the case of a capital loan, the amount can be used for no matter what, the purpose of the use is not specified.

Loan term

When it comes to loan terms, we can differentiate 3 categories: long-term (5 years or longer), short-term (within one year) and medium-term (1-5 years) loans. In general, long-term loans are available at lower interest rates than short-term ones, as financiers expect to receive the instalments over a longer period. The loan term may also indicate the loan purpose, it can imply what economic activity the business is financing.

For example, in case there is a temporary lack of financing, it is sufficient to apply for a short-term loan, whereas in the case of larger investments it is advised to plan for a longer-term, this decision is also justified by the return on investment.

Coverage

Regarding the coverage, the loan products currently available on the market can be divided into two categories. In the case of a secured loan, the risk of repayment is reduced by the creditor acquiring a lien on movable or immovable assets of the debtor. It often happens that the collateral is the asset for which the loan was requested itself. In case the debtor is unable to pay the instalments and meet his obligations, the creditor may be entitled to the ownership of the mortgage. Unsecured loans do not require an asset as a collateral, in these cases the coverage is the debtor’s monthly income. The total loan amount is determined based on the company’s regular income, the financial company may limit or block the company’s earnings in case of insolvency, this way the instalments can be repaid. In addition, the company’s past and its plans for the future are also taken into account, when calculating the maximum loan amount. It is important to note that even in the case of an unsecured loan, the debtor is liable for the repayment of the loan with all his assets, regardless of the registered lien.

Currency

It is also crucial to consider the currency of the loan. Due to the volatility of Forint and foreign currency exchange rates, it is important to compare which choice can be more favourable in our case. Since the financial crisis of 2008, it is a general opinion that being indebted in foreign currency is very risky due to the fluctuation of the exchange rate, but it is worth to be a bit more nuanced on this topic – for companies whose income is denominated mostly in foreign currency, applying for a foreign currency loan might be worth considering, as the exchange rate risk may be opposed to the Forint. Deciding which type is more beneficial in our case might as well depend on the fluctuation of the international interest rates and real estate prices.

Subsidized loans

Subsidized loans are those loan products that are offered to financiers with preferential interest rates through governmental or international institutions. However, it is important to point out that subsidized loans are not always cheaper than classic loans provided by commercial banks. It is also possible that the subsidies can lead to similar or slightly higher interest rates than those of the other loan products on the market, but the subsidies may increase the risk borne by the financier and thus it becomes possible to give credit to those businesses who would otherwise not be eligible for financing. Such companies often only have access to more expensive loan products, subsidized loans may also provide a solution to this problem.

The most popular example for subsidized loans is the new NHP Hajrá and the MFB Crisis Loan, both of these loans have a wide range of loan objectives, with very low interest rates (fixed 2.5% per annum) and state guarantees they contribute to the economic growth of domestic SMEs.

Thanks to the subsidies, even start-ups or smaller businesses can get a loan, the fixed interest rate makes the amount of the instalments predictable.

At Hitelpont, we have appropriate solutions for financing short-term liquidity shortages as well as larger investments. (Source: Michael Longmire, Unsplash)

Several categories can be differentiated when it comes to the loan objectives

Investment loans

Investment loans are suitable for those developments that require larger financing. This could be, for example, the purchase of production equipment, technological developments, or even the purchase or development of real estate or infrastructure.

In the case of purchasing real-estate the task is relatively easy as usually, the property can provide adequate collateral for the loan – or at least to the extent of its own worth. If we own other unencumbered properties, those can also serve as collateral, so the financier can increase the loan amount and the business can carry out its investments with lower self-financing. However, before applying for an investment loan, it is important to consider how much income and profit the loan will bring in the long run, as the investment is only advisable it if increases revenue for the company. To evaluate this aspect, the creditor typically requests the submission of a business plan so that the business concept can also be evaluated.

There exists a type of investment loan that is also available for businesses at an early stage. This helps alleviate the difficulties that may arise in the initial phase, the appropriate investment loan can give a huge boost to a business.

In the case of investment loans, the administration process usually takes 4 to 6 weeks, due to the assessment of the investment purpose, the valuation of real estate and/or other collaterals and the production of the documentation related to the investment. The more complex the investment is, the longer the administration process takes.

Working capital loans

In the case of a working capital loan, we are talking about a loan that can be used primarily for the purchase of raw materials and current assets. This type of loan may also be adequate if expenses arise that will only be recouped in the future so that the company is facing a lack of funding in a certain period.

This can occur, for example, if a company wants to stock up on materials or has an increase in the number of orders or customers, so liquidity needs to be provided in advance for the products that will be sold in the future. Commercial banks usually provide working capital loans to companies that are more mature without real estate collateral, but in the case of smaller SMEs, real estate collateral is still expected. In the case of working capital loans, the loan purpose must be verified upon application as well as during the loan term. The loan term usually ranges from 1 to 3 years.

Choosing the appropriate loan product is a complex process, the most important goal is that the loan fits the business’ needs. (Source: Markus Spiske, Unsplash)

Overdrafts

This type of loan proves to be appropriate in the case of temporary liquidity problems, but it can also be useful if revenues and expenditures are not generated at the same time.

A great advantage of overdrafts is that it can be applied for even without collateral, the administration process is quick and easy, but the loan amount is being determined based on the company’s financial situation, meaning that it all depends on the management and financial results of the previous years. Accordingly, overdrafts are typically available to more mature companies, who have been operating for at least 2 entire business years. The loan amount is reviewed annually (or even more frequently) by the financier and in case a negative change is experienced in the company’s revenue, the amount may be reduced or even withdrew.

The overdraft can be used for any loan purpose, interest must be paid after the amount used, but it is important to emphasize that it primarily provides short-term financing.

Lombard loan

A Lombard loan is a short-term, mortgage-based loan that provides temporary financing. The collateral can be any type of movable asset, like an existing bank deposit, security or even a car in some cases. Lombard loans provide an appropriate solution if the creditor has significant savings relative to the loan amount, these savings are blocked as collateral for the loan and unblocked upon the full repayment of the loan. The loan administration is typically fast.

Leasing

A lease agreement means that the lessor purchases an item (in most cases a car), which is transferred to the lessee at the end of the lease. In fact, a lease is a mixture of renting and purchasing, the two types of leases are closed- and open-ended types. The advantage of an open-ended lease is that the VAT on the share capital can be reclaimed and the interest of the lease fee can be accounted for as an expense, thus it is a good choice for businesses. It can be used to buy a specific device or asset if it has a significant secondary market, such as vehicles.

Account factoring

Factoring refers to the financing of trade receivables related to freight services. In this case, the receivables are the subject of collateral, thus is it possible to put the cash back into circulation. It can be a solution in cases where the supplier wants to get the purchase price from an earlier sale than what his buyer agreed to in the contract. It is important to note that during the account factoring, both the supplier and the buyer are carefully examined by the financier, so it is usually available for more mature, medium, or larger-sized businesses, and due to its rapid turnover, they should expect significantly higher interest rates than those of investment loans.

In the case of classical factoring, we are talking about the purchase of receivables that have not yet expired, which can therefore be a good solution for reducing receivables and supporting a more predictable management.

 


In case you are interested in any of our loan schemes, you can obtain more information by clicking on the Our Products button. On the bottom of all the loan product pages, you can find the loan calculator, which can be used to calculate the expected repayment instalments. The loan application process can be initiated online, it is also possible to request a callback from one of our colleagues. Should you have any other questions or be interested in a loan product available at Hitelpont, please call our customer service directly at +36-1-239-8638 or reach out to us at one of our Contact details.