SME

What do SMEs need to consider when applying for a loan?

A lack of liquidity leads to reminders, debt collection and frequently bankruptcy. By taking out a loan for your business you can avoid liquidity problems. When does it make sense to apply for a loan? What do SMEs need to apply for a loan? What type of loan should it be? In this blog post you will find a summary of what entrepreneurs should know about applying for a loan.

Liquidity is the ability of a company to meet payments deadlines on time. According to Swiss Confederation’s SME Portal liquidity bottlenecks are the main reason why companies fail. “If the ability to pay is not ensured at all times there is a threat of reminders, debt collection and, in the worst case, bankruptcy. It is estimated that 9 out of 10 bankruptcies are due to a liquidity crisis,” says the SME portal article.

How do liquidity problems arise?

“We have a lot going for us, we are generating more turnover than ever before and therefore do not have to worry about our liquidity”. Unfortunately, this statement is not true, since turnover alone does not say much about the liquidity of your business. For example, if you have high expenses for materials, rent or wages and your customers do not pay their invoices on time, liquidity problems can arise despite good sales figures. More and more companies are confronted with defaulting customers. This can lead to your company having to reduce its product range, cut project budgets, postpone investments, or even lay off employees.

Reading Tip: Liquidity plans help companies to use liquid funds correctly and avoid bottlenecks. In this blog post, you will learn which pitfalls lurk in liquidity planning and how you can avoid them.

When is it worth applying for a loan for your SME?

If you recognise any liquidity difficulties at an early stage, your company can take the appropriate countermeasures. This includes, among other things, applying for a loan. For SMEs, a loan application usually makes sense when major purchases such as furniture, machinery, business vehicles or materials are pending.

In principle, most SMEs in Switzerland finance themselves mainly through equity. However, debt financing is gaining in importance. According to a study by the Department of Economics at the Lucerne University of Applied Sciences and Arts, only six per cent of SMEs had debt financing from non-banks in 2016, while by 2021 it was already 15 per cent. According to the study particularly loans from families, friends or shareholders and leasing have increased steadily in the last five years. The share of SMEs with bank credit has remained at 32 per cent.

What you should do before applying for a loan

Regardless of where you apply for a loan for your business, you should gather the following before applying for a loan:

1. Cash flow calculation

The cash flow is often referred to as the most important operating indicator. The cash flow shows whether the liquid funds you have generated yourself are sufficient to secure the existence of your company. Employing a cash flow calculation, you can determine the cash inflow and outflow in your company during a certain period. This helps you to anticipate future liquidity shortages and to determine the amount of the loan. With the help of the cash flow calculation, also consider by when you can repay the loan.

2. Liquidity plan

In a liquidity plan you record all cash outflows (payments) and cash inflows (receipts) during a certain period. Cash outflows include costs for purchasing goods, rent and wages. Cash inflows include cash on hand, deposits from clients, tax refunds and – if the credit decision is positive – borrowings. Show in the liquidity plan how the loan affects the liquidity rate.

3. Budget plan

Companies need the right financial, time, material, and technological resources to be able to work effectively and achieve their goals. In budget planning you record which teams, departments and projects receive how much money and how many resources. With careful budget planning you always know where and to what extent you need to direct the money flows in your company. In the budget plan specify exactly which business goals the loan will be used to achieve.

Extra Tip: To keep the time spent on liquidity and budget planning manageable, more and more SMEs are turning to a fully automated accounting system. This helpful tool relieves you of all accounting tasks and makes it significantly easier for you to create financial plans.

Which type of loan makes sense for your business?

It depends on both internal and external factors which type of loan best suits your business. For example, company size, liquidity level, investment plans, growth targets and market developments all play a role.

Here is an overview of which types of loans SMEs most often opt for:

  • Fixed loans: With a fixed loan, a bank or private individual lends money to your business for a certain period, usually at interest. Usually you repay the loan amount in a single instalment until the end of the term. Fixed loans are particularly useful if your company wants to make medium – or long-term investments.
  • Fixed advance: You or your company receive an agreed amount of money as an advance with a Fixed Advance. The interest rate, loan term and loan amount are defined when the contract is concluded. With a fixed advance you can secure more short-term liquidity needs.
  • Overdraft facility: Overdraw your company’s bank account to avoid short-term cash shortages. The overdraft facility is the classic instrument for securing short-term liquidity and processing payment transactions. Credit limits and interest rates depend on the risk for the bank.
  • Leasing: Capital goods leasing is an alternative to borrowing. A leasing company provides your company with equipment for a monthly fee. In practice, companies often lease machinery and particularly business vehicles.Whether fixed loan, fixed advance, overdraft, or leasing: Would you like to know how you can reduce the time and effort you spend on bookkeeping and preparing a credit application? Book a free demo of the Swiss accounting solution Accounto here.