The Financing Handbook

The Financing Handbook

Empowering you as an entrepreneur to make better financing decisions

Person typing on a laptop with text about nominal and effective interest rates on the screen, next to a smartphone on a table.

Every other Swede finds it difficult to understand financial agreements, terms, and conditions. In addition, one in five has signed financial agreements that they did not fully understand. The Consumer Credit Act, therefore, serves an important function in protecting borrowers and making it easier to make informed decisions. Business loans, on the other hand, lack corresponding protection for the borrower.

Effective interest rate, good credit practices, cost ceilings, and everything else that exists when you take out a car loan, get a credit card, or buy something on installment – does not apply if you take out a business loan. Instead, it is up to the lender to choose how the price and terms are presented.
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Therefore, getting an idea of what a loan will actually cost can be difficult, and evaluating different options can be even more difficult. This is not a problem for large companies with financial and legal expertise. But it can be for all companies that do not have it. However, far from all entrepreneurs know that this is the case.

Therefore, Froda has developed the Financing Handbook. To ensure that you, as an entrepreneur, know what to look for when borrowing. So you can avoid loan agreements that would be more expensive than you thought and almost impossible to get out of.

97
%
Of Sweden's companies, [many] are sole proprietorships or have fewer than ten employees

77
%
Of Swedes, [many] are unaware that business loans lack protection for the borrower

Avoid embellished offers

Business loans can be more expensive than they appear. Here are three tips on things to check a little extra before you borrow.

Is it an annual interest rate or a monthly interest rate?

The cost you pay for a loan is usually expressed as a percentage. The interest rate is typically presented as an annual rate, but with business loans, a monthly rate is also common.

Therefore, check if a low interest rate is really an annual rate or if the interest is actually twelve times higher than you thought.

Hand holding a modern smartphone with three cameras against a blue sky with clouds.

A picture of a helping froda employee

Are there any additional fees?

Even if the loan's interest rate is low, it doesn't mean the total cost will be. If there's no effective interest rate stated, but there are many additional fees, the actual cost you pay for the loan will increase significantly.

Also, double-check that there is no fee for paying off the loan early.

Does the cost decrease or increase over time?

Sometimes the interest on business loans is expressed as a monthly fee instead of a percentage rate. Converted to a percentage, the fee in relation to the loan amount usually corresponds to a reasonable annual interest rate.

The problem is that while the interest cost for a loan with a percentage rate decreases as the loan is repaid, the interest cost for a loan with a fixed fee will increase. This is because the size of the fee in relation to the loan amount increases as the loan is repaid.

A woman working on her laptop

55
%
Of Swedes find it difficult to understand financial contracts, terms and conditions

19
%
Signed financial agreements without fully understanding their meaning

The Financing Handbook

It can be difficult to know what a business loan costs and even more difficult to compare offers that are presented in very different ways. With the help of the Financing Guide, you can get a better grasp of common terms and learn to make better financing decisions.

Nominal interest rate

What is it?

The nominal interest rate is the interest rate usually stated in your contract and in the lender's marketing. The nominal interest rate indicates the actual cost of borrowing money and does not include any additional fees.

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How does it affect things?

The nominal interest rate gives an indication of how much it will cost you to take out the loan. However, since it does not include all costs, you should not use it to compare different offers.

Effective interest rate

What is it?

The effective interest rate is the interest rate that shows the actual total cost of a loan. The effective interest rate includes the nominal interest rate and any additional fees, and is therefore a more effective measure for comparing offers.

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How does it affect things?

As mentioned, the effective interest rate gives a fairer picture of the total cost of a loan and is therefore the one you should use when comparing offers. For consumer loans, the effective interest rate must be stated, but for business loans, it is common that it is not. It is not entirely easy to calculate the effective interest rate yourself. But simply put, you can take your interest costs over a period and add any fees during the same period to arrive at the effective interest rate.

Annual interest rate

What is it?

Annual interest rate is a measure used to indicate the amount of interest cost for a loan, and as the name suggests, the annual interest rate shows how large the interest costs are over a period of one year. Annual interest rate is the most common way used to express the interest rate, and since consumer loans have annual interest rate as standard, it is usually annual interest rate that is meant when it comes to interest in general.

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How does it affect things?

The annual interest rate shows how much a loan would cost you over a period of one year. However, the fact that it is expressed as an annual interest rate does not affect the actual cost of the loan, but it is only a way of showing what the cost of the loan is. However, it is useful to check which period the interest rate indicates in order to more easily compare offers. If you compare an offer with an annual interest rate and one with, for example, a monthly interest rate, it will be misleading if you do not recalculate one of the offers.

Monthly interest rate

What is it?

The monthly interest rate, just like the annual interest rate, is a way of indicating the interest costs for a loan. As the name suggests, the interest costs for a loan with a monthly interest rate are calculated on a monthly basis, which is why the percentage that indicates the cost of the loan will be lower than for a loan with an annual interest rate.

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How does it affect things?

If the interest rate is presented as a monthly interest rate, it can easily appear lower than an annual interest rate at first glance. This does not affect the actual cost of the loan, but it can be misleading. If you want to find out what the interest rate for a loan with a monthly interest rate would be if it were stated as an annual interest rate, simply take the percentage indicated and multiply it by twelve.

Fixed interest rate

What is it?

A fixed interest rate means that the interest rate on a loan is locked for a certain period. During this period, the interest rate will not change, regardless of market conditions.

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How does it affect things?

A fixed interest rate provides predictability and stability in loan costs because the payments will not change during the fixed period. This can be advantageous in times of rising interest rates. The disadvantage is that if market interest rates fall, you are stuck with a higher interest rate than would otherwise be available.

Variable interest rate

What is it?

A variable interest rate means that the interest rate on a loan can change over time in line with changes in the market interest rate. A variable interest rate usually follows the development of the policy rate.

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How does it affect things?

A variable interest rate can lead to lower costs if market interest rates fall, making it an attractive option during periods of falling interest rates. On the other hand, a variable interest rate involves a higher risk because loan costs can increase if market interest rates rise. This makes it less predictable and can negatively affect cash flow if interest rates suddenly increase.

Straight-line amortization

What is it?

Straight-line amortization means that the borrower pays off the same amount on the loan's debt at each payment, in addition to the interest. The interest is calculated on the remaining debt, which means that the interest cost decreases over time as the loan is paid off.

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How does it affect things?

With straight-line amortization, the repayments are larger at the beginning of the loan term, when the interest costs are highest, and then gradually decrease as the debt decreases and thus also the interest costs for the same.

Annuity

What is it?

An annuity is a type of amortization where you pay the same amount at each payment date throughout the loan's term. The amount consists of both interest and amortization, and the distribution between these two changes as the loan is repaid, with the interest portion decreasing and the amortization portion increasing.

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How does it affect things?

Unlike straight-line amortization, the size of the repayments for an annuity loan remains the same throughout the loan's term. The portion of the repayment that constitutes interest costs is higher at the beginning of the loan's term but then decreases as the debt decreases. As the interest portion decreases, the amortization portion increases instead, which means that the amount you pay remains the same with each repayment.

Fixed fee

What is it?

For business loans, a fixed fee is sometimes used, usually monthly, instead of regular interest as payment for the loan. The fixed fee does not depend on the loan amount or repayment period but is a predetermined cost that is paid regularly throughout the loan's term.

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How does it affect things?

A monthly fee may appear to be a simple and predictable payment structure. However, it can make it difficult to compare the cost with a traditional loan with interest. Expressed as a percentage, the fee may appear normal in relation to the loan amount. But since the fee does not decrease as the debt decreases, the cost of the loan will theoretically increase as you repay the loan. This is because the fee increases in relation to the remaining loan amount. It is therefore important to carefully calculate the total cost of the loan by multiplying the monthly fee by the number of payments during the loan's term to get an idea of what it actually costs.

Personal guarantee

What is it?

A personal guarantee means that a person (guarantor) vouches for a company's loan. If the company cannot repay the loan, the guarantor becomes liable to pay the debt instead.

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‍How does it affect you?

Personal guarantees are common for business loans and can increase your chances of getting a loan approved or getting more favorable terms. However, it entails a certain financial risk for the guarantor because you become personally liable for the debt if the company fails to repay it.

Mortgage

What is it?
A mortgage is a form of security where the lender has the right to take over property if the borrower cannot pay their debt. For business loans, mortgages are commonly used as security for larger loan amounts. Examples of mortgages are business mortgages and real estate mortgages.

How does it affect you?
As mentioned, mortgages give the lender security, which can lead to you getting better loan terms when you borrow. However, you risk losing the pledged property if the company is unable to repay the loan according to the agreement.

Cost ceiling

What is it?
A cost ceiling means that there is an upper limit to how large the total costs, including interest and fees, may be for a loan. For consumer loans, there is a cost ceiling for high-cost credits where a loan may never cost more in interest and fees than the original loan amount.

How does it affect you?
There is usually rarely a cost ceiling for business loans as it is not regulated to the extent that consumer credit is. If there is a cost ceiling, it can therefore provide security in knowing that the cost of the loan will never be more than what the cost ceiling indicates.

Interest rate differential compensation

What is it?
Interest rate differential compensation is a fee that a borrower may need to repay if they pay off a loan early. It is used to compensate the lender for the loss of interest income and occurs most often with loans with a fixed interest rate.

How does it affect you?
If the loan is repaid according to the agreement, the interest rate differential compensation does not affect the cost of your loan. However, it gives you less freedom as it limits your ability to easily repay the loan early if you want to. If you want more flexibility, you should therefore avoid loans with interest rate differential compensation. A basic rule is to always avoid loans with interest rate differential compensation if the interest rate on the loan is variable.

Arrangement fee

What is it?
The arrangement fee is a one-time fee that may be charged to cover any administrative fees that the lender has had in connection with the granting of the loan.

How does it affect you?
If a business loan has an arrangement fee, it means that the total cost of the loan will be more expensive and you therefore need to include it when you calculate the effective interest rate. Since arrangement fees are usually stated in fixed amounts and not as a percentage, it will have a greater impact on the effective interest rate the smaller the amount you borrow.

Invoice fee

What is it?
An invoice fee is a fee that the lender may charge for sending invoices or notices to the borrower. The fee is then charged each time the borrower receives a notice.

How does it affect you?
Invoice fees increase the total cost of the loan and should therefore be included when you calculate the effective interest rate. Since invoice fees occur with each invoice or notice, it has a greater impact the more repayments you have during the loan's term. Invoice fees are not as common today as before as there is the possibility of electronic invoicing or direct debit. If a lender charges an invoice fee even though the repayment takes place through electronic invoicing or direct debit, it may be a warning sign.

Administrative fee

What is it?
Administrative fees are fees that lenders may charge for administrative work related to the loan. These can be of various kinds and range from one-time fees to ongoing fees during the loan's term.

How does it affect you?
Just like invoice fees and arrangement fees, administrative fees affect the total cost of the loan and you should therefore include them when you calculate the effective interest rate. How much impact they have depends on the size of the loan and the length of the term, where they have the greatest impact on smaller loans with a long term. Just like invoice fees, administrative fees have begun to be phased out in line with digital development as the administrative work is automated.

About the initiative
For a safer loan market for entrepreneurs

97 percent of Sweden's companies are sole proprietorships or have fewer than ten employees. Their ability to evaluate financial agreements and lenders is more similar to that of private individuals than that of large companies with financial and legal expertise.

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Since we believe that it should be easy for entrepreneurs to make well-informed decisions, we have built Froda around having clear agreements, transparent prices and good conditions. Unfortunately, this is far from standard when it comes to business loans. It is more the rule than the exception that no two business loans are alike.

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With the Financing Handbook, we hope to make it a little easier for entrepreneurs to know what they are getting into and facilitate the comparison of different offers.