In this article, you will learn how to:

• identify the key factors for obtaining a business start-up loan in Luxembourg;

• understand best practices to improve your chances of securing financing while limiting personal risk

What you need to know before applying for a bank loan

A commercial bank finances the economy, but first and foremost it is a business that aims to limit risk and preserve profitability. In Luxembourg, as throughout Europe, financial institutions must also comply with strict prudential regulations requiring a certain level of capital reserves against the loans they grant.

In this context, banks assess projects cautiously. They generally expect entrepreneurs to contribute financially themselves and favour shared financing arrangements with other partners in order to spread the risk.

Who can obtain a bank loan?

In theory, any new entrepreneur — whether starting or acquiring a business — can apply for a bank loan. In practice, however, several factors strongly influence the bank’s decision.

What strengthens your loan application?

Your profile

• having qualifications or experience consistent with the planned activity within the management team;
• not being subject to banking restrictions or repeated payment incidents.

Your preparation

• presenting a clear and realistic business plan, including credible financial forecasts;
• demonstrating that you understand both the risks and opportunities of your project.

Your personal contribution

• banks generally expect a personal contribution of 20% to 30% of the total project cost;
• this contribution demonstrates commitment and reduces perceived risk.

Your ability to reassure

• adopting a professional approach during discussions;
• mastering your figures and financial plan;
• being able to clearly explain the guarantees offered.

What types of investments can be financed?

Banks primarily finance long-term investments directly linked to the business activity:

• commercial real estate (purchase and sometimes renovation of premises);
• equipment and machinery (machines, tools, IT equipment);
• furniture and fittings (offices, retail fit-outs);
• company vehicles.

On the other hand, intangible investments (research & development, innovation, intellectual property protection, launch marketing) are less frequently financed through traditional bank loans.

For these needs, it is advisable to explore public support schemes, including those offered by the Ministry of the Economy, which are often better suited.

What interest rates should you expect?

Rates vary depending on:

• the type of loan (investment, real estate, working capital);
• the repayment period;
• the profile of the entrepreneur and the project.

Tip: use the simulators provided by banks online to compare offers and anticipate your monthly repayments. It is an effective way to prepare for discussions with your banking advisor.

Be careful with personal guarantees: key points to understand

Even if the bank considers your project viable and your repayment capacity sufficient, it may still believe the risk is not fully covered. It will therefore seek to secure the loan.

The bank will generally start by taking guarantees over the company’s assets (equipment, inventory, trade receivables). If this is insufficient, it may require the business owner to commit personally:

• personal guarantee: you undertake to repay the loan with your personal assets if the company can no longer do so;
• pledge or mortgage: the bank may seize a specific asset (savings, vehicle, property) in the event of non-payment.

These guarantees directly affect your private assets. It is therefore essential to seek ways to limit their scope. A clear and realistic business plan, combined where possible with external guarantees, can often reduce the level of collateral required.

Why banks request guarantees from young businesses

Granting a loan is a bit like lending someone your car.

The more experienced the driver, the better they know the route, and the more they have already demonstrated responsible behaviour, the fewer guarantees you will require.

Conversely, if the driver is inexperienced, taking an unfamiliar road and lacking any track record, you will ask for more security.

Guarantees are intended to compensate for the lack of business history, not to penalise you as a new entrepreneur.

As mentioned earlier, a bank analyses a loan application with one objective in mind: ensuring that, should difficulties arise, the risk remains under control. To do so, it compares the requested loan amount with what the company and entrepreneur can contribute in return: equity, personal contributions, guarantees or sureties.

The younger the business, the less financial history or equity it has, the more the bank will consider the project risky and demand substantial guarantees. Conversely, a well-prepared project with solid personal investment, realistic forecasts and potentially external guarantees will reduce perceived risk and therefore the level of collateral required.

External guarantees: why they matter

In summary, the bank is not trying to protect itself “against you”, but rather to balance the risk between what you borrow and what secures repayment.

This is where mutual guarantee schemes become highly valuable.

In Luxembourg, two organisations play a key role:

• the Mutualité de Cautionnement (MC) for commerce and services;
• the Mutualité des PME for the crafts sector.

Their role is simple: to guarantee part of the loan on your behalf.

For example, the MC (www.cautionnement.lu) can guarantee up to 80% of the loan amount, including credit facilities.

The result:

• the bank takes on less risk;
• financing becomes easier to negotiate;
• your personal guarantees may be reduced.

Practical Example

Imagine a young carpentry business receiving an unexpected order requiring the immediate purchase of €10,000 worth of materials.

Thanks to a short-term credit facility partially guaranteed by a mutual guarantee scheme, the company can finance the purchase without using its initial cash flow.

Over six months, the interest cost remains limited, while the business fulfils the order, secures a new client and prepares for further growth.

Expert opinion

“The goal is not to encourage the use of bank debt at all costs. It is preferable to limit borrowing to amounts justified by realistic forecasts and to favour flexible solutions such as credit lines for temporary needs. With a guarantee scheme in place, negotiations with the bank often become simpler and more balanced.”
— Guylaine Marchi Hanus, business advisor and founder of EIS