Loan

What it means

A loan advances money against agreed repayment and interest. By purpose it splits into working capital loans, which fund day-to-day operations, and investment loans, which fund assets over a longer horizon.

An instalment has two parts: interest is a cost, principal merely reduces the liability (amortisation). So loan repayments never appear in full in the profit statement, yet leave the account in full.

A loan agreement and a borrowing contract are not synonyms in Slovak law. A credit agreement under the Commercial Code means providing funds against interest, whereas a loan under the Civil Code can be interest-free and can also cover things of the same kind. Money from the company’s owner is handled as a shareholder loan, with rules of its own.

How it works in practice

The bank assesses turnover history, indebtedness, the structure of liabilities and equity and the ability to service debt from operations. For larger amounts it wants a business plan and a cash flow plan rather than a profit plan - instalments are paid in cash, not in results.

Besides interest, count the fees, insurance, security and covenants - conditions the company must observe throughout. Breaching one can make the whole loan immediately repayable.

At year end we split the loan balance into the part due within a year and the long-term part. The balance sheet then shows how much cash the company must find for repayments in the next twelve months, and the bank judges from it whether short-term assets are enough to cover that.

What to watch out for

Funding operating costs with an investment loan, or the reverse, is the classic error: the horizons do not match. An overdraft bridges payment timing; assets are funded by a loan or a lease with a term matching their useful life.

For a small company the bank often asks for a personal guarantee from the director or a shareholder, or for a blank promissory note. The signature is easily overlooked among the other papers, but if the company gets into trouble the creditor goes straight for the guarantor’s private assets, which the limited liability of an s. r. o. does not protect.