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 borrowings. 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.
If you have questions about business loans, please contact us at Cisco & Co CPAs. We can help you evaluate your financing options and make the right choice.