A loan is cash, assets, a security or other liquid assets, which is given to another party for the loan value future repayment with interest or other agreed financial liabilities. A loan can be formalised as a one-time sum or a credit limit without term within an agreed maximum amount. Prior to concluding a loan transaction, the loan terms and conditions are agreed. If the creditor needs collateral for sense of security, then this will be established in the loan conditions. Most loans have fixed covenants, like maximum interest rate and repayment term.
Reasons for taking a loan
A company goes through different stages in its development characterised by different main tasks, financial management particularities and other contingencies. These are characterised by a common denominator – companies focused on growth need capital to realise their potential, which is used to finance the main activity or investments. Both equity and debt capital may be used for financing – usually debt capital i.e. a loan is preferred. When it comes to loan types, Baltic companies mostly use loan, leasing or bonds to raise additional capital.
Raising capital from credit institutions
Traditionally, Baltic companies have raised capital from credit institutions, whose terms or covenants are often rigid and may not always consider the particularities of the projects. So an ambitious project may be left without financing from the credit institutions. Usually, this happens for two reasons. A project may be left without funding due to credit institutions’ regulatory framework and strict transaction terms, and the company applying for a loan might not fit the bank’s parameters. Secondly, raising capital may turn out to be too costly for the entrepreneur. Therefore, investors also operate on the loan market, who provide financing service for companies in different stages of development.
Raising capital from investors
Involving investors is an alternative way for companies to raise capital other than institutions providing financing services. A loan agreement can be concluded with an interest rate, repayment schedule and collateral structure which suits all parties. For a company, a loan is the easiest way to raise debt capital. The loan drafting process is faster and more flexible compared to organising a bond issue for example – typically, one or two investors participate in the transaction. Loan capital from investors is an alternative to borrowing from credit institutions, but after due diligence, it may appear that the investor is unable to provide the loan at more favourable conditions than a credit institution.