While it’s important to consider the interest rate when choosing a business loan, it’s not the only aspect to consider. Avoid giving up too much control and flexibility just to lower your interest rate by a few percentage points. Otherwise, at the slightest glitch, your business and the assets you pledged to obtain this lower rate could find itself in a precarious position.
Compare available offers
Banks offer different loan products. The main differences are often in the details. Ask for clarification on the following.
What types of loans are offered by each bank?
Are there account managers who specialise in your type of loan or business? These people are sometimes in a better position to appreciate and understand your activities. Is your account manager able to negotiate with you? For example, could you get lower fees and more flexible repayment terms?
Don’t take your bank’s word for it.Take advantage of your network of business contacts. Ask them to tell you about their experience with a particular bank, the quality of service, any problems they may have had, what was and was not negotiable, and what the bank was looking for in a request for preparation.
Before committing to a lending institution, you should consider the following five factors.
1. Duration of the loan
What term is the lending institution willing to offer?
A long-term loan comes with higher borrowing costs, but it may be worth the expense to avoid running into cash flow problems.
2. Loan amount
What percentage of the cost of your project is your lending institution willing to finance? This will determine the size of the investment you need to make and whether to diversify your funding relationships by doing business with a second bank.
Does the lending institution offer flexible repayment options?
As a business owner, you know that even the best plans can go wrong when the unexpected happens. It’s important to have a frank discussion with your bank about what would happen if you were unable to make the scheduled repayments. Would your bank allow you, for example, to temporarily defer principal repayments? It is important to let you know in advance. Don’t wait to be in a crisis.
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What guarantees are required from you in the event of non-payment?
If you are in default, your bank can ask the court for the right to sell the collateral. It is always a solution of last resort since everyone loses.
Collateral may include your accounts receivable, personal property (equipment and other fixed assets), inventory, real estate, personal guarantees and third party bonds.
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The type of guarantees you offer depends on the nature of your business, the bank’s terms and conditions, and how much leeway you have to negotiate.You need to know what assets you stand to lose in case of default. This risk may extend beyond your business assets and include your personal property.
5. What obligations does the bank impose in terms of financial information and reports?
Most loan terms include financial reporting requirements. These are the financial statements and reports that you must provide to the bank each year within a given period, according to the loan agreement. Small loans generally have fewer financial reporting requirements.
A covenant is an agreement between a bank and a borrower in which the borrower agrees to abide by various conditions in order to obtain a loan. A borrower who breaches a covenant is in breach of the terms of their loan, so the bank may require the full loan to be repaid.For example, under a restrictive covenant, you could agree not to obtain another loan or to maintain a certain financial ratio at a given level.
Protect your current cash
It is important to negotiate a loan that meets your needs and those of your business. That’s why you should carefully consider when and how much to borrow, and how quickly you want to pay off your loan.
Many of these considerations relate to protecting your business’s ongoing cash flow – to ensure that you can continue to finance its day-to-day operations.