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18 Jul 2016

Small Business Loans


When most entrepreneurs begin the entire process of seeking a business loan, among the first concerns that occupy their thoughts may be the cost of the borrowed funds - namely the interest rate they'll be charged.


As you already know, just obtaining a lender to consider your company loan request is hard enough nowadays - but, to get one to provide your company capital at a rate that you feel is the most beneficial to your operations is utterly impossible.


Every single day I get requests from entrepreneurs (start-up or established business people) who want to know where they can get a cheap business loan.


My answer is always exactly the same - define cheap.


No loan is affordable but on the other hand no loan is pricey either - if it is offer proper use.


The difference from a few percentage points on the loan isn't any t nearly as meaningful as what is done with the borrowed funds proceeds. Loans should be a leveraging asset - meaning that you leverage current cash flow to obtain a loan then use that loan to create more in new revenue than the loan costs.


Thus, financing is just an asset for use with a business in its operation or quest to generate more income and wealth.


Let us take a simple example:


You and also another local competitor have identified an industry niche that could potentially create new uses for your present products. While this market is yet unproven, you both believe that it has tremendous potential.


You go to your lender seeking a company loan for $100,000 for three years. The lender agrees and quotes an interest rate of 10%; making your monthly payment approximately $3,227.


You are feeling this rates are too high given the long relationship you have had with this particular lender and all sorts of money that for them over the years. Plus, you spent a couple of hours online researching the average business loan rates are around 8%.


Your lender states that he may be capable of getting your rate reduced to 8% but you'll need to hold back until their next loan committee in two weeks to have it approved.


At 8%, you monthly loan amount could be approximately $3,134 - a $93 per month savings or $3,351 within the life of the loan over the 10% rate for the similar amount.


In the mean time, your competitor goes to exactly the same lender and receives a loan quote for the same amount in the 10% rate. Your competitor takes the offer.


By the time the borrowed funds committee approves your 8% rate - your competitor has executed its marketing plan with this new market, has created interest in its products and is now generating yet another $10,000 per month in new revenue from this niche.


When your loan is funded, you attempt to complete your marketing strategy but discover that you really are a bit too late and your business is only in a position to generate $4,000 monthly in additional revenue (your products is seen as a copy cat to the new market leader - your competitor).


While this new revenue will pay for the borrowed funds - the brand new revenue generated for the clients are still some $6,000 monthly less than your competitor.


Let's consider the main difference. Over 3 years, the quantity that you have to repay for the loan is $112,811 ($3,134 times Three years). Your company earns $4,000 monthly for those same Three years and also you earn $144,000 having a net gain of $31,189.


Your competitor spends more on his loan - $116.162 - but earns some $360,000 or net profits of $243,838 or 782% greater than your business all since you wanted a cheap loan.


The bottom line here is the price of the loan really did not matter here. The cost that your business taken care of not receiving into this niche before your competitor is a lot higher (a loss of some $6,000 monthly in revenue) then the $93 per month held on.


If you compare his rate of 10% towards the profit he made of some $6,773 monthly ($10,000 - the payment per month) - his loan really was the cheaper one.


And, it truly doesn't matter should you actually were built with a competitor trying to beat you to definitely the marketplace. It comes with an opportunity cost of not implementing a business loan or by not receiving it when the time is right.


Even if you were just delayed a couple weeks while fighting for a lower rate - the quantity of income that you simply lose by waiting (a sum that you could never constitute as time does not go backwards) would exceed the amount you were trying to save - in this case, (should you did not have a competitor beat you to definitely the niche) waiting fourteen days would cost about $5,000 in new revenue when you were only obtaining a savings of $3,351 in the lower interest rate.


Now, That does not mean that you should not test to obtain a better deal or lower interest rate but, ensure that by doing so you are not quitting more then you are trying to save.


Thus, when you squabbled over a few percentage points searching for that so called cheap business loan, the price you taken care of not getting the loan promptly undoubtedly exceeded any potential savings.

Term Loans



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