Are you thinking of taking out a loan
to buy new machinery or additional inventory for your business? Before you sign
that loan document or credit application, consider the following questions.
What's
the true cost of borrowing? The interest rate on your business
loan may be variable, fluctuating over the life of your loan. Calculate the
impact of potentially higher future payments on your ability to pay other debt,
such as amounts you owe your vendors. Include fees in your assessment. Your
lender may ask for loan origination fees, application fees, administrative
fees, and fees for gathering financial information about your company. Consider
intangible costs too, including how long you have to wait before the loan is
finalized and what opportunities you're missing while waiting.
How
will the loan be secured? Your lender will most likely require
you to provide collateral, meaning you'll be asked to pledge assets as security
to ensure loan repayment. If you're unable to pay the loan back, you run the
risk of losing those assets. In some cases, you can use your business inventory
or accounts receivable as collateral. Keep in mind those assets will be
unavailable for other business borrowing. Alternatively, depending on the size
of your business, you may have to use personal assets, such as your house or
cash savings, as security. Make sure you have assessed the risk of loss before
finalizing the loan.
Can
you wait to make the purchase? Saving for purchases may
be old- fashioned, but you'll be investing in your business, with no lender to
repay and no interest expense or other fees. In addition, you retain control of
all your assets. Here again, opportunity cost will play a role in your
decision, as you may miss out on taking advantage of good deals or
possibilities for business growth.
When
you're ready to evaluate your financing options, give us a call. We can help
you make the right choice.
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