Financing Growth in a Trades Business: The Honest Maths
Financing growth in a trades business usually starts with the wrong question. Hiring a third or fourth engineer does not need a loan; it needs two to three months of that person's fully loaded cost sitting in the bank before their work turns into money. That gap is a working-capital problem, and there are five ways to plug it: an overdraft facility (Swedish checkkredit), a term loan (företagslån), leasing, hire purchase (avbetalning) and invoice finance (fakturaköp or factoring). Each has a real cost you can calculate. But before you borrow at any of them, shorten your payment terms, take deposits and invoice in stages, because that money is free, no credit committee can withdraw it, and there is more of it than you think.
What a third engineer costs you before they earn
Start with a number, not a feeling. Say you hire on 38 000 SEK a month gross.
- Employer contributions add roughly 31.42% for a standard-age employee in Sweden. Confirm the current rate at skatteverket.se before budgeting on it.
- Holiday pay accrues at 12% under the Semesterlagen unless your collective agreement says more.
- Van, fuel, tools, phone, insurance, workwear and certification, plus their share of software and your accountant.
- Non-billable time: travel, stock runs, and the first months where they are slower and someone senior checks their work.
Rule of thumb: fully loaded monthly cost lands between 1.7 and 1.9 times gross salary. Call it 65 000 to 72 000 SEK for that 38 000 SEK hire.
Then the timing, which is the part that bites. You pay them on the 25th. They work through January. The job finishes 5 February, you invoice on the 12th when the paperwork catches up, terms are 30 days, the customer pays on day 44. Cash lands in late March. You have funded ten weeks of that person, plus materials, out of your own account.
So the honest question is not "can I get a loan". It is: can I carry 130 000 to 200 000 SEK of extra working capital per hire, permanently? The gap does not close when the first invoice is paid. It stays open as long as that person works for you.
The five instruments, honestly compared
The costs below are typical shapes for a small limited company with clean accounts. Anyone quoting an exact rate without seeing your accounts is selling. What matters is the shape of the cost, not the headline.
| Instrument | What it is | What it really costs | Best for | The catch |
|---|---|---|---|---|
| Checkkredit (overdraft facility) | An agreed limit you draw and repay freely | Interest on the drawn amount, plus an annual fee on the whole limit | The wages-versus-invoice gap. Exactly this. | The fee runs on the full limit. Take a 500 000 limit, average 150 000 drawn, and your effective rate is far above the headline. The bank can also cut the limit at review, usually in the quarter you need it most. |
| Företagslån (term loan) | Fixed sum, fixed term, amortising monthly | Interest plus an arrangement fee; predictable | A one-off step change: premises, an acquisition, a workshop fit-out | Poorly suited to working capital: you borrow once and repay on a schedule unrelated to when customers pay. Almi, the state-owned lender, looks at cases a bank declines, but prices higher for the risk and usually wants a bank alongside it. |
| Leasing | You rent it; the lessor owns it | Each payment is deductible as an operating cost; the interest hides in the residual value assumption | Assets that date fast, or where you want no disposal risk | You never own it, and the effective rate is buried. Ask for it in writing; if the seller will not put it on paper, that is your answer. VAT is reclaimed per payment, not up front, and passenger cars carry a restricted VAT deduction. |
| Avbetalning (hire purchase) | You own it from day one and pay it off | Interest is deductible; the asset is depreciated | Vans and kit you will keep five years or more | It sits on the balance sheet as debt and the next lender sees it. The upside most owners miss: on a commercial vehicle you reclaim the full VAT at purchase, not over the term. On a 400 000 SEK van that is 80 000 SEK back at the next VAT return. |
| Fakturaköp / factoring | You sell the invoice; the financier advances cash and collects | A percentage of invoice value, often plus an admin fee | One genuine surge, or one large slow-paying customer | The dangerous one: the price is quoted per invoice and read as an annual rate. A 2.5% fee on a 30-day invoice is roughly 30% annualised. And your customer is now chased by a finance company with your name on the letter. |
Why higher interest rates changed the answer
When money was almost free, borrowing against growth was close to rational: carrying the gap cost a rounding error against the margin a new engineer produced, so you could buy your way past a slow ledger and never feel it. Not any more. Every percentage point on your checkkredit is charged against the gross margin you were already fighting for, every month you stay drawn. Credit-financed growth has to clear a bar it did not five years ago, which pushes the answer back toward working-capital discipline: unglamorous, permanent and free.
What a bank actually wants to see
Banks do not lend against enthusiasm. Before you walk in, have these ready:
- Two to three years of accounts showing a profit, not just turnover growth. Rising turnover on a thinning margin reads as a warning: it says you are buying work.
- A clean credit file, no payment defaults and nothing outstanding on the tax account (skattekonto). Late employer contributions kill applications faster than a weak margin: they say you are already using the state as an unwilling lender.
- A liquidity budget, month by month, twelve months ahead. Not a profit forecast: cash in, cash out, closing balance. Most trades firms cannot produce one, and producing it is half the reason you get the facility.
- Your order book: signed quotes, named customers, dates. Not "we are busy until autumn".
- Debtor ageing: who owes what, and how old. If your ledger shows you tolerate 60-day payers, the bank concludes the facility will be permanently drawn and prices it that way.
- Security. Expect a floating charge over the business (företagsinteckning) and, for a small limited company, a personal guarantee. That guarantee removes much of the point of having a limited company. Read it, negotiate the amount, and ask in writing what releases it.
Outside Sweden the shape is identical. A UK bank wants filed accounts, a debenture and a director's guarantee. The vocabulary changes. The risk assessment does not.
The cheaper money you already have
Here is the arithmetic that beats every product in the table. Turnover of 6 000 000 SEK a year is roughly 16 400 SEK of sales per day. Cut average days-to-cash from 45 to 25 and you release about 330 000 SEK, permanently, at a cost of zero. That is two engineers funded without a credit application. Where the twenty days come from:
- Invoice the day the job is done. The lag between completion and invoice date is the cheapest days to remove and the ones nobody measures. Track it for a month and you will be unpleasantly surprised.
- Shorten the terms. Fifteen days is normal for consumer work. For business customers, the Swedish Räntelagen gives a 30-day default, statutory default interest and a fixed late-payment compensation on top; longer terms generally need your agreement, so stop granting it by silence. The UK equivalent is the Late Payment of Commercial Debts (Interest) Act.
- Stage invoicing (delfakturering). Any job over four weeks gets three to five invoices tied to triggers the customer can verify, agreed in the signed quote before you start. The biggest single lever on a growing firm: growth means bigger jobs, and bigger jobs mean longer funding gaps.
- Deposits and material advances. Lay out 120 000 SEK on switchgear and you are lending the customer 120 000 SEK at 0%. Ask for it up front, or have it invoiced direct.
- Match supplier terms to customer terms. Supplier credit is the cheapest money in the trade and free inside terms. If your wholesaler gives 30 days and your customer takes 45, you fund the difference on every job. Negotiate one end or the other.
- ROT timing. On Swedish domestic work the customer pays only 70% of the labour cost. The rest comes from Skatteverket after you file the request for payment (begäran om utbetalning), which you can only do once the customer has paid. Every week you sit on that filing, you lend 30% of your labour to the state for free. Filing weekly rather than monthly finds cash people take facilities for.
These fail for administrative reasons, not commercial ones. The job data lives in a van, a notebook and someone's head, so the invoice waits. Run the job in one system, so the invoice goes out the hour the work is signed off, the stage plan sits in the quote from the start, and the ROT request is ready the moment the customer pays. That converts directly into days off your collection period, and it is what OdinTask is built to do.
A decision order for financing growth in a trades business
- Measure first. Average days from job complete to cash in the bank. If you cannot state that number, you cannot size a facility.
- Fix the free money. Invoice lag, terms, stage invoicing, deposits, ROT filing. One quarter, nothing else.
- Re-measure. Recalculate the gap per hire. It usually shrinks by a third or more.
- Then take a checkkredit, sized to what is genuinely left, as insurance you occasionally touch rather than a balance you live in.
- Use avbetalning or leasing for assets only. Never for wages. That is how firms end up with a repayment schedule and no van to show for it.
- Keep factoring for emergencies: one customer, one invoice, annualised cost written down before you sign.
The uncomfortable truth about financing growth in a trades business is that a facility never fixes a slow ledger. It funds it, at interest, indefinitely. Fix the ledger and the facility becomes what it should always have been. Something you almost never need.
FAQ
Should I take a loan or an overdraft to hire another engineer?
An overdraft facility, if either. Hiring creates a recurring timing gap between paying wages and getting paid, and an overdraft flexes with that gap. A term loan hands you one lump sum and a fixed repayment schedule that ignores when your customers actually pay, so you repay hardest in the months the gap is widest. Size any facility to the gap you have measured, not to what the bank offers you.
How much working capital does each new employee need?
Budget two to three months of their fully loaded cost, plus their materials. Fully loaded means gross salary plus employer contributions, holiday pay, van, tools, insurance and non-billable time, which typically lands around 1.7 to 1.9 times gross pay. On a 38 000 SEK salary that is roughly 130 000 to 200 000 SEK tied up before their work converts to cash, and it stays tied up for as long as they work for you.
Is leasing or hire purchase better for a work van?
Hire purchase suits a van you will keep five years or more, because you own it and, on a proper commercial vehicle, you reclaim the full VAT at purchase rather than spread across the term. Leasing suits kit that dates quickly, or where you want a fixed monthly cost and no disposal risk. Whichever you pick, ask for the effective interest rate in writing. If the seller will not provide it, assume it is high.
Is factoring ever worth it for a small trades firm?
Occasionally, and only with the annualised cost written down first. A 2.5% fee on a 30-day invoice is not 2.5% a year, it is roughly 30%. That can be worth paying to bridge one genuine surge or one large slow-paying customer. It is not worth paying permanently. Your customer will also notice that a finance company now chases them for money, and that has a cost you never see on the invoice.
What does a bank want to see before lending to a trades business?
Two to three profitable years of accounts, a clean credit file with nothing outstanding on the tax account, a month-by-month liquidity budget twelve months ahead, a signed order book with named customers, and your debtor ageing. Expect to give a floating charge over the business and, for a small limited company, a personal guarantee. Late employer contributions sink applications faster than a thin margin does.
Can I fund growth without borrowing at all?
Often, yes. On 6 000 000 SEK of turnover, cutting average days-to-cash from 45 to 25 releases roughly 330 000 SEK permanently and costs nothing. It comes from invoicing the day the job finishes, shorter payment terms, stage invoicing on long jobs, deposits for expensive materials, matching supplier terms to customer terms, and filing ROT payment requests weekly instead of whenever someone remembers.
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