Raise some capital for the business?
Capital idea, old chap!
Get your company back afloat with a
cash injection - take out a business loan but which one?
A Business Loan is usually entered into when the borrower
either needs funds to invest in new equipment or research or when there
is a requirement to 'bridge' the period between paying suppliers and
receiving payment from its own clients. Most companies looking for a
business loan will just approach their normal banker and accept any
reasonable offer that is forthcoming without looking further. This is
unfortunately something we had to do when we were defrauded by a senior
member of staff who stole the incoming cash leaving us to pay our
creditors. There just was not the time to investigate other banks and
lenders and, as a result, we were straddled with a loan at very
unfavorable interest rates.
If your company is in the position of needing to borrow money, take a
moment to look at what other financial deals are on offer. The important
thing is to make your investigation as thorough as possible - it is all
too easy to get caught in the terminology so keep it simple!
Before you start working out which business loan offer to accept, you
need to decide on two main factors - the amount you want to borrow
(called the 'principal') and how long (the 'term') you wish to borrow it
for. There is a world of difference in how much interest you will end up
paying or even the interest rate you will be charged according to how
much you want to loan and for how long. A common minimum term for a
business loan is 5 years with a normal maximum term of about 30 years.
Decide also whether you want to go for fixed, variable or a capped loan.
Which one you choose is, ultimately, a gamble and will depend on how
important to your budgeting a regular repayment is.
Before actually committing yourself to applying for any specific loan,
try to get an 'in principle' decision. Apart from saving yourself time,
having the good sense to look at all options can also be perceived by an
outsider as making your company look desperate for cash. Word soon
travels that your business is in difficulty (even if it isn't) and
suppliers can exacerbate the problem by demanding payment with order.
The other reason for not making a formal application is that if a bank
refuses a loan this fact is supposed to be declared to all other banks.
Given that even a refusal based on one bank's whim (eg 'We don't offer
business loans of under $50,000' when you only wanted $25,000) will
count against you.
Most loans are repaid monthly but is the interest calculated on the
residual or is it calculated annually? It is a popular bank process to
calculate interest at the beginning of a year and then only take into
account the repayments against it at the end of that year. Even a street
moneylender gives you credit for how much of the principal you have
repaid him!
Finally, when you have settled on the most suitable business loan for
your company, make sure that you know all of the bank fees. There is no
limit to how many not-so-little 'administrative' fees they can add. Look
out for 'setting up fees', 'arrangement fees' or 'legal costs'. These
hidden extras can be substantial and turn a good deal into a bad one.
One last consideration - if the bank or lender you are proposing to use
is not your current one, will they give you a better deal if you move
your business to them? Now is a good time to find out and it will
certainly make things easier with the repayments.
Good luck with finding the best finance for your business loan.
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