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July 9, 2024
5 min read

Business loan: the guide for companies

All you need to know about business loans.

In the fast-paced world of business, securing financial resources can make the difference between stagnation and success. One critical avenue for businesses to access the capital they need is through a business loan.

Whether it’s a startup, a big corporation, or a medium-sized company: a business loan is suitable for various sizes and stages and provides external capital. We delve into the key aspects of business loans, uncovering how they empower companies to make strategic investments and propel growth.

re:cap_Business Loan
Key facts of a business loan.

Definition: what is a business loan?

A business loan is a sum of money lent to a business by a financial institution, which the business is obligated to repay with interest over a predetermined period. Business loans come in various forms, each tailored to meet specific business needs. They can be classified based on the duration (short-term, medium-term, long-term), the purpose (working capital, equipment financing, real estate loans), or the security (secured, unsecured).

Business loans are a critical financing instrument for companies to fuel growth, expand operations, and manage cash flow. They play an important role in enabling businesses to achieve their strategic goals.

Business loans fulfill various financial needs, such as making investments, securing working capital, financing expansions, or bridging short-term gaps. Depending on the relationship with the bank, companies can achieve favorable conditions and avoid high interest rates.

Business loans represent the most widely used form of external capital acquisition. In 2022, banks granted €1.8 trillion in loans to companies and self-employed individuals in Germany. The majority of these are small business loans.

Components of a business loan

A business loan is an agreement between a company and a bank. The key components may vary depending on the lender and the type of loan. Here are some commonalities:

  • Loan amount
  • Loan term
  • Interest rates
  • Amount of repayment installments
  • Consequences of default or payment failure
  • Collateral for the bank

The suitability of a business loan for a company depends on its capital requirements and investment projects. Companies must review the contract conditions thoroughly before finalizing a loan agreement.

The Loan Application Process

  1. Preparation: before applying for a loan, businesses should prepare a detailed business plan, financial statements, and cash flow projections.
  2. Choosing the right Loan: companies must assess their financing needs and select the appropriate type of loan. Factors to consider include the loan amount, repayment terms, interest rates, and collateral requirements.
  3. Finding a lender: businesses can approach traditional banks, credit unions, online lenders, or alternative financing institutions.
  4. Application submission: the application process involves submitting the necessary documentation, such as financial statements, tax returns, business licenses, and personal identification. Then, lenders conduct a credit analysis.
  5. Approval and disbursement: once approved, the lender will issue a loan agreement detailing the terms and conditions. Upon signing, the loan amount is disbursed, and the business can begin using the funds.

re:cap_Business Loans
The lending process for a business loan.

Different types of a business loan

Various types of loans fall under the category of business loans. Usually, banks offer business loans. However, there are other institutions providing debt financing for companies.

Term loan

These are traditional loans where a business borrows a lump sum and repays it over a set period with interest. They can be short-term (less than a year), medium-term (1-5 years), or long-term (over 5 years). Term loans are commonly used for major capital expenditures, expansion, or large projects.

Lines of credit

A line of credit provides businesses with flexible access to funds up to a certain limit. Interest is only paid on the amount borrowed. This type of loan is ideal for managing cash flow and covering short-term operational needs.

Loan for starting a business

startup can access a wide range of financing instruments, both debt and equity. Besides venture capital, bootstrapping, or angel investors, they can get specific startup loans from traditional banks. 

Such a loan is suitable for:

  • Startups with a classic business model that banks can reflect and understand with their risk model.
  • Startups with an innovative business model that already generates revenue and is preferably profitable.
  • Startups that can take debt and repay it, including interest and installment payments.
  • Startups that don’t want to dilute their shares and stay independent. 

A loan for starting a business provides planning security for young companies. They know exactly which capital costs occur and when.

However, access to credit is difficult for many startups, especially those in the tech and SaaS industries. They can hardly offer any collateral, such as real estate or machinery. They also have a business model outside the scope of a bank's risk analysis.

Investment loan

Companies can use an investment loan to finance long-term growth measures or projects. Usually, this includes traditional tangible assets such as production facilities, infrastructure projects, machinery, or real estate.

In contrast to an overdraft facility (working capital), which primarily covers ongoing costs, the credit line of an investment loan is intended to advance a company over the long term. Therefore, the duration is up to ten years in some cases.

Investment loans are tied to a specific purpose. A clear definition of the intended use enables a bank to better assess its risk.

Earmarked lending does not only include infrastructure projects for manufacturing companies, though. It also covers project financing for service providers such as agencies, consultancies, or other professional services. They use loans, for example, to finance large individual expenses (hardware or events).

Here's an example of Dutch company Stories, who has used the credit line from re:cap to refinance it's operational expenses for further growth.

Bank guarantee

A bank guarantee is not a traditional business loan where a company receives debt from a financial institute. The bank guarantees a company to a third party and receives a commission. Interest or repayment installments are not included.

Suppliers and service providers, for example, often ask for a bank guarantee before they provide their services. It secures their risk in the event payment defaults. The bank guarantees that the company is financially able to meet the claim.

Goods financing

With goods financing, a company receives a loan to purchase goods or raw materials, which are resold at a profit. This type of business loan is also known as goods pre-financing or purchase financing.

Goods financing is particularly relevant for companies active in retail or e-commerce and regularly require large quantities of goods to run their business.

Commodity financing instruments include:

  • Letter of Credit, which is issued by a bank and guarantees payment to the seller once certain conditions are met.
  • Documentary Collection: This is a payment arrangement where the buyer's bank processes the payment once the required trade documents are presented. 
  • Supplier credit: suppliers grant buyers a temporary loan to pay for goods. 

Goods financing is an important instrument for bridging financial bottlenecks in terms of liquidity. This is especially true when companies need to purchase large quantities of goods, but payment is only made after a certain period.

Overdraft facility

The overdraft facility is also known as a working capital or operating loan. It provides companies with short-term liquidity to finance ongoing expenses. This type of business loan enables companies to react to fluctuations in their capital requirements and to bridge short-term financial bottlenecks.

The most important aspects of an overdraft facility are

  • Flexibility in obtaining liquidity: an overdraft facility is a flexible form of financing that allows companies to withdraw money from their bank account up to a pre-agreed maximum amount. 
  • Short-term financing: Overdraft facilities are designed for short terms, often for one year or less.
  • Risk management: Companies should practice effective risk management to prevent short-term debts from turning into long-term financial burdens.

Alternatives to a business loan

Traditional bank loans may not be ideal for all companies. Some startups, especially in the tech and SaaS sectors, face challenges with traditional business loans from banks. Such alternative instruments include:

These alternatives, often offered by fintechs, online lenders, or funds, allow companies to diversify their capital structure beyond traditional routes. They leverage automation and risk assessment based on real-time financial data and specific SaaS- and Tech-KPIs, providing more accurate capital solutions with flexible terms.

The advantages of alternative financing:

  • Companies have more freedom as the capital is not tied to a specific purpose.
  • Companies gain a high degree of flexibility as there are no rigid repayment models, and debt can be taken more easily.
  • Companies have access to real-time data on their financial performance. This allows them to react to problems at an early stage.

Benefits of business loans

  1. Access to capital: business loans provide the necessary capital to start or expand operations, purchase inventory, or invest in new opportunities.
  2. Cash flow management: loans can help smooth out cash flow fluctuations or volatility, ensuring that businesses can cover operational expenses even in crisis.
  3. Ownership retention: unlike equity financing, business loans do not require giving up a portion of ownership. Business owners retain full control over their company.
  4. Tax benefits: interest payments on business loans are often tax-deductible, which can reduce the overall cost of borrowing.
  5. Build credit: successfully managing a business loan can help build the company’s credit history, making it easier to obtain financing in the future.

Risks and Challenges of business loans

  1. Debt burden: taking on a loan increases the company's liabilities, which can affect its balance sheet and financial health.
  2. Repayment pressure: regular repayments, including interest, can strain the company’s cash flow, especially if revenues do not increase as expected.
  3. Collateral risk: secured loans require collateral, which can be seized by the lender if the business defaults on the loan.
  4. Creditworthiness: businesses with poor credit histories may struggle to obtain loans or may face higher interest rates, making borrowing more expensive.
  5. Market conditions: economic downturns or changes in market conditions can affect a business's ability to repay loans, increasing the risk of default.

Conclusion: understanding a business loan is crucial

Business loans are a vital financing instrument for companies, providing the necessary capital to drive growth, manage operations, and achieve strategic objectives. While they come with risks and challenges, careful planning and thorough preparation can maximize their benefits.

As the financial landscape evolves, businesses have access to a diverse array of loan options, making it crucial to stay informed and choose the right financing solution. By leveraging business loans effectively, companies can enhance their competitive edge, achieve long-term success, and contribute to economic growth.


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How do SaaS companies work?

SaaS stands for Software-as-a-Service and refers to a licensing and distribution model by which companies offer software solutions online as a service.

What growth stages do SaaS companies go through?

After the preparatory early-stage phase, the product goes live, becomes better known, and establishes itself in the market, before the customer base ideally expands significantly and finally either a company sale, a merger, or further growth takes place.

Why is revenue financing ideal for SaaS companies?

In the important second growth phase, when SaaS companies are already on the market and generating recurring revenue, revenue financing provides flexible SaaS funding based on the ARR without dilution or loss of control.

What is ARR?

ARR refers to annual recurring revenue. Specifically, in the subscription economy, ARR refers to the annual value of regular revenue generated through subscriptions.

What does ACV mean?

ACV stands for Annual Contract Value and in a SaaS business, it refers to the average annual value of a subscription - i.e., the holistic contract value excluding one-time fees divided by the contract term in years.


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What is a corporate loan?

As a counterpart to the personal loan, the corporate loan serves entrepreneurial purposes - as a short-term cash injection for liquidity needs or as an investment for long-term growth. Entrepreneurs use the borrowed capital, for example, for new personnel, a larger office, marketing, better hardware, or the company's establishment.

What kind of business loans are there?

A short-term business loan runs for a few months or years, while a long-term loan runs for several years. If a company needs capital quickly, an overdraft is an excellent short-term loan financing option - there are not many conditions to be met for this, as the principle is similar to an overdraft.

What are the providers of business loans?

There are many providers of business loans. Three overriding types come into focus:
- via the principal bank
- state-subsidized
- digital solutions
The first way is via the branch banks. The options are diverse, whether long-term or short-term credit, investment or working capital credit, just like the linked conditions. Subsidized corporate loans are also run through the house bank, but regional or nationwide development banks (such as KfW) are involved here.
Modern solutions come from FinTechs that specialize in smart financing. Whether credit or alternative, this is where startups and large companies meet technology-savvy innovators of the digital age.

What is the advantage of corporate loans?

A corporate loan is usually available quickly. In addition, because it is debt financing, founders do not have to give up control as well as company shares and do not have to share profits with lenders.

What is the disadvantage of business loans?

Business loans come with interest and are often tied to a specific purpose, so entrepreneurs are limited in how they can use the capital. It is also usually a restrictive concept with strict repayment terms, warrants, and very little flexibility - which is why many companies are looking for a suitable loan alternative.

How do credit and loans differ?

Some refer to short-term financial assistance and a smaller amount as a loan and to longer terms and higher capital as a loan. However, the terms are usually used interchangeably.

What are the interest rates on corporate loans?

They can be less than 1% or in the double digits. The credit rating determines this: the higher the risk class, the higher the interest rates. The amount of capital, term and any collateral also determine the interest rate. Therefore, it is always a good idea to compare different corporate loans.

Who grants corporate loans?

Companies can obtain the traditional loan from their principal bank - a government subsidy via federal or regional development banks is also possible. Modern variants come from FinTechs, which use technology-driven solutions for smart financing.

What are the alternatives to corporate loans?

Various financing solutions work with equity and debt. With equity financing such as venture capital, founders lose valuable company shares and often have to give a say. A particularly smart alternative to corporate loans and equity financing is non-dilutive, non-restrictive and very flexible turnover financing.

What is the best credit alternative?

There is no all-comprising answer to this question, as financing is always an individual solution. However, recurring revenue financing is increasingly establishing itself as a particularly attractive and popular alternative to loans and equity financing.

What makes re:cap stand out as an alternative to loans?

With re:cap, SaaS companies can obtain growth capital very easily and quickly - up to 50% of ARR. The innovative funding works with planned revenues and also flexibly aligns repayments accordingly. In addition to on-demand financing, re:cap offers valuable insights and benchmarks on request.


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What does debt financing mean?

In debt financing, companies receive a certain amount of money from an external investor. The company holds the debt capital for a limited period and must be repaid - usually with interest and within a fixed time duration.

What does debt capital include?

Debt capital includes typical liabilities of a company, such as loans, bonds, and provisions, as well as unique forms like deferred income.

What are examples of debt financing?

There are various types of debt financing, which can basically be divided into short-term and long-term debt. Unique and mixed forms are also possible - examples:
- Short-term: overdraft, trade credit, acceptance credit
- Long-term: promissory note loans, bonds, long-term bank loans
- Special form: leasing, factoring, asset-backed securities
- Mixed form: mezzanine as a mix of equity and debt financing

What is short-term debt capital?

Short-term debt capital is provided to companies for a short period of time - repayment usually takes place within a few months. Such capital is primarily used to meet short-term liquidity needs.

What is long-term debt?

Long-term debt capital is provided to companies for a longer period of time - repayment usually occurs within several years. The capital is used for investments.

What is the difference between equity and debt financing?

From the perspective of the capital providers, it is primarily a question of liability because, in the case of equity financing, capital providers are liable for entrepreneurial activities. In return, they usually receive a share and benefit directly from the profits. Because founders relinquish shares and entrepreneurial control, this is referred to as a dilutive type of financing. This is not the case with debt financing, which involves interest and is generally more restrictive.


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How can I finance my startup?

From bank loans to private savings to equity financing: There are many ways to finance a startup - through external providers and your own capital. As a novel and popular solution, so-called revenue financing is also becoming more and more established in Germany.

Which companies fund startups?

In addition to investment companies from the venture capital segment, there are innovative FinTech companies such as re:cap. They innovate to create modern funding solutions. re:cap enables companies in the subscription economy to trade future revenues for on-demand, non-dilutive capital. Fast, transparent and easy.

Who is startup funding with re:cap suitable for?

The funding solution from re:cap is specifically aimed at subscription companies that reach a growing customer base with their already launched product and generate predictable, recurring revenues. In addition, the legal entity must be at least partially located in the EU.

How quickly can I get startup funding?

As long as you are within your financing limit, you can access new funds as often as you like. The financing limit will be increased based on the growth of your business and the track record on the re:cap platform.
The funding will typically arrive in your bank accounts within two business days once it gets approved.


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What is working capital?

Working capital is also called operating working capital. It is the difference between current assets and current liabilities and, as a balance sheet ratio, provides information on companies' capital stock and financial strength.

What does working capital tell us?

The working capital figure shows which funds are tied up in regular company operations - it can also be used to determine whether working capital financing is necessary.

Is high working capital good or bad?

A positive value shows that current assets can cover current liabilities - this is important in terms of the golden rule of the balance sheet. A negative value conveys a risk, because affected companies are considered to be illiquid. This can lead to financial bottlenecks.

Can working capital be too high?

The question of working capital levels is answered differently depending on the company or business model - especially across industries. However, working capital levels that are too high often indicate that working capital is being used less wisely and that too much cash is being tied up.

What are examples of working capital?

In business management, working capital is usually indirect and long-term goods that companies need for their products and services. A distinction is made between tangible resources, such as warehouse and office space, and intangible ones, such as licenses.

How does working capital financing work?

Working capital financing allows companies to increase their working capital and generate positive value. It provides them with short-term cash to pay liabilities or make investments.

What are the different working capital options?

Working capital financing is multifaceted. Depending on the industry and business model, various types may therefore be considered, such as drawing on the credit line, receivables credit, factoring, and inventory lending. Increasingly popular are alternative solutions such as non-dilutive and non-restrictive sales-based financing.


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What is a convertible loan?

The definition of a convertible loan is simple: it is a normal loan in which the company does not repay the borrowed amount after the expiration of the term, but converts it into company shares. It is therefore technically a combination of both equity and debt.

How does a convertible loan work?

The following scenario is a typical example of a convertible loan: A company receives capital with a predefined interest rate. The parties agree on a term and also a discount on the company's shares, which acts as a risk compensation. At the end of the term, the investor receives the shares in the amount of the convertible loan plus interest - so-called qualified capital for the company.

How high are convertible loans?

Usually, convertible loans are around 100,000€ - but they can also be up to 400,000€ and more. To collect as much capital as possible, start-ups often arrange several convertible loans with different investors.

What should a convertible loan agreement regulate?

In principle, there is freedom of contract here - a convertible loan agreement is therefore not subject to any legal rules. The following components are the basis: the amount of the loan, the interest rate and discount, and the term. In addition, some parties agree on a cap (maximum valuation) or a floor (minimum valuation). Subordination is also included in many convertible loan agreements.

What is an alternative to the convertible loan?

Founders can obtain convertible loans quickly and easily and use them flexibly. These advantages also characterize re:cap's convertible financing. However, convertible financing involves giving away shares. This is not the case with re:cap's solution, which is non-dilutive funding for sustainable growth. Therefore, it is an ideal alternative to the convertible loan.


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Is crowdfunding free of charge?

No. In case of success - i.e. if your project reaches its target budget - you pay platform and transaction fees between 4 and 12 percent to the crowdfunding platform. The exact amount depends on the platform. If your campaign fails, you pay nothing.

Why is crowdfunding so popular?

Crowdfunding brings many advantages. The fact that the legal form and creditworthiness of the project do not play a role in crowdfunding certainly plays a major role in its popularity. Thus, especially creative people and artists of all kinds, as well as non-profit initiatives, can collect money for their projects. The positive marketing effects, as well as customer proximity and loyalty, also ensure the good reputation of crowdfunding.

Who is crowdfunding suitable for?

Crowdfunding originates in the artistic sector for financing various creative projects in the fields of music, film, theater, and art. Today, however, it is also used by private individuals, non-profit organizations, and companies of all kinds - whether in the startup phase or as a boost in ongoing operations.

What are the different variants of crowdfunding?

There are four types of crowdfunding, which differ primarily in the consideration:
1) In equity based crowdfunding, investors receive returns on their investments.
2) In reward based crowdfunding, the initiators provide non-cash or intangible compensation for the investment.
3) In donation based crowdfunding, investors donate their contribution.
4) In lending based crowdfunding, the investors grant private loans with a fixed interest rate to the initiators.

How do I receive crowdfunding?

Whether you are a startup or a medium-sized company: crowdfunding can theoretically be 'applied for' by anyone. However, success depends on how many investors are convinced by the project. Anyone who wants to try their hand at crowdfunding must first create a campaign on one of the common crowdfunding platforms and advertise it on their own channels.

Does crowdfunding make sense?

Crowdfunding offers particularly many advantages for private, non-profit, and creative projects - or as a supplement to public funding. In addition, crowdfunding can be particularly worthwhile for early-stage startups that have largely completed their product development and now need fresh capital for growth. Young companies that want to test their business model or product can also benefit from the communication and participation of a crowdfunding campaign - providing an indicator for other forms of financing.

Is crowdfunding proprietary or debt financing?

Crowdfunding is financing based on debt capital. The capital provided comes from a large number of investors, mostly private individuals and companies - the so-called crowd or swarm. Hence the term 'crowd financing'.

What are the alternatives to crowdfunding?

Crowdfunding is considered an alternative financing option, which is opposed by several common alternatives (or supplements). Among them are public funding, corporate credits, venture capital, or even founder competitions. Newer forms of financing, such as re:cap's recurring revenue financing, offer another alternative to crowdfunding.


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What is factoring?

The definition of factoring is simple: to quickly receive the money from open invoices and generate liquidity, companies hire a factor who settles the outstanding payments as an advance and takes over the accounts receivable management. It is therefore a sale of receivables.

How does the selling receivables work?

The factor checks the verity of the invoice and the creditworthiness and default risk of the debtor. Then the factor pays the majority of the outstanding invoice amount to the contracting company, usually within 48 hours. After the factor has collected the receivable from the debtor, the company receives the remaining gross amount that the factor has retained as security.

What types of factoring are there?

Anyone interested in factoring should take a closer look at their options because there are differences. In recourse factoring, the factor bears the full risk of default. Less secure - from the point of view of the selling company - is non-recourse, in which there is no protection against bad debts. If companies do not want their customers to know about factoring, they can choose the silent option.

What are the risks involved in factoring?

Since there is a large number of factoring companies, companies can quickly end up with a provider whose credit rating itself is weak. However, the performance of a factor is not always directly apparent. In the worst case, the assigned factor goes insolvent and the company loses a lot of money. In addition, some customers see it as a sign of mistrust if it is not the company providing the service that demands payment but a third party unknown to them - this could be circumvented by silent factoring.

What are the costs of factoring?

There is no single answer to this question because the fees are very opaque - based on various key business figures. In addition, the total costs are not only made up of a clearly defined factoring fee but of several items. Interest often accrues as well.

What are the most popular alternatives to factoring?

TexSince factoring is revenue-based financing, other revenue financing options are also great alternatives to factoring. This is also true for re:cap's solution - it is tailor-made for companies with a subscription business model that generate predictable, recurring revenue.t


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What are venture capital alternatives?

Venture capital is not suitable at all times - and not for every type of company. Common alternatives are:
- Venture debt (hybrid debt financing),
- Founder competitions,
- Government subsidies
- or alternative forms of financing,such as crowdfunding.
Companies with subscription business models can also exchange their future revenues for immediately available capital - with re:cap financing.

When is venture capital worthwhile?

Generally for founders and entrepreneurs in the growth phase. But not every startup is attractive to investors. Venture capital funding is worthwhile when the business idea is innovative, the sales argument is clearly recognizable, and the founding team is convincing. In addition, the market must promise growth.

How do I get venture capital?

Private venture capitalists, also known as business angels, and so-called venture capital companies provide equity capital. But not just like that. If you want to go into fundraising, you have to be convincing. Prerequisites are a watertight pitch, a realistic understanding of the current company valuation, the amount of capital needed and the time frame in which the capital is needed.

How does venture capital work?

Venture capital is a form of private equity financing in which venture capital companies provide capital to promising unlisted companies in exchange for a stake in the company. Those who want to grow their company with venture capital must first contact investors and convince them of the company's merits.

How long does venture capital take?

Often several months pass between the start of fundraising and the receipt of venture capital. The pitch only follows after the founding team has identified potential investors. Afterward, the company is preliminarily reviewed by the potential investors. If this goes well, a term sheet is signed, followed by due diligence. The capital will flow only when the investment documentation has been completed.
If you can't or don't want to wait that long, you can look for alternative forms of financing like the one offered by re:cap. With re:cap you can bridge the time to the next round and thus, optimize the upcoming financing round. At the same time, this increases your options when looking for investors.


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What is alternative financing?

These are forms of financing that companies can use as an alternative to established models such as loans - they are often modern solutions that are quickly and easily available digitally.

What are the different types of alternative financing?

The market for alternative financing options is growing, so companies can already choose a model that suits them individually. The better-known ones include convertible loans, factoring, crowdfunding, and venture debt. Alternative debt instruments, including recurring revenue financing or revenue-based financing, which have been successfully established in the U.S., are still rather new in Germany but becoming increasingly well-known and popular.