| Index »LOANS & OVERDRAFTS |
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| LOANS & OVERDRAFTS |
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| Whether you are starting a business, expanding it or investing in it to stay competitive, you may need to borrow money. You may want external
finance to cover day-to-day expenses when developing your new product, service or marketing strategy until your business generates enough surplus cash to meet these costs. Alternatively, you may want to borrow money to cover the cost of new equipment or premises. |
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| Loans |
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| A loan is an amount of money borrowed for a set period within an agreed repayment schedule. The repayment amount will depend on the size and
duration of the loan and the rate of interest. |
| Loans are generally most suitable for paying for assets, like vehicles and computers, for start-up capital and in other instances where the amount of money you need is not going to change.The terms and price of loans vary by provider and may be negotiable. |
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| Advantages |
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Interest rates may be fixed for the term so you will know the level of repayments throughout the life of the loan. |
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You are guaranteed the money for a certain period - generally three to ten years - unless you breach the loan conditions. |
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Loans can be tied to the lifetime of the equipment or other asset you're borrowing the money to pay for. |
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At the beginning of the term of the loan you may be able to negotiate a repayment holiday, meaning that you only pay interest for a certain
amount of time whilst repayments on the capital are frozen. |
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While you are obliged to pay interest on your loan, you do not have to give the lender a percentage of your profits or a share in your company. |
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There may be an arrangement fee that is only paid at the start of the loan but not throughout its life, though this may not necessarily be the
case if it is an on-demand loan - an annual renewal fee may be payable. |
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| Disadvantages |
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Most loans have strict terms and conditions. |
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They're not very flexible - you could be paying interest on funds you're not using. |
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You could have trouble making monthly repayments if your customers don't pay promptly, causing cashflow problems. |
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In some cases, loans are secured against the assets of the business or your personal possessions, including your home. The interest rates for secured loans may be lower than for unsecured ones, but your assets or home could be at risk if you cannot make the repayments. |
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There may be a charge if you want to repay the loan before the end of the loan term particularly if the interest rate on the loan is fixed. |
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| It is not a good idea to take out a loan for ongoing expenses. Expenses are best funded from the cash received from sales, possibly with an overdraft as backup
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| Applying For A Business Loan |
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| Demonstrating that you have taken on personal financial risk to set up your business will prove to a potential lender that you are committed to
its success. If you can provide security, a smaller capital investment may suffice. You will need to show that you have contingency plans for repayment of the loan if things go wrong. You may sometime have to offer something as security. A Decision have to be made about what personal and business assets, such as equipment and buildings, can be used as collateral for a loan. |
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| You need to keep lenders informed of your progress, particularly any changes or problems. The overall personal impression you make to a
potential lender is important. They may scrutinise your educational background, your business experience and your employees. |
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| Having a comprehensive business plan will make the applying for a loan much easier. A business plan is a written document that describes a business, its objectives, its strategies, the market it is in and its financial forecasts. Cashflow is an area which will be closely scrutinised, as will your payment record with other creditors. |
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| Banks or building societies are used to working with new businesses and can offer advice as well as deals to meet varying business needs. They may offer ways to help you manage your cashflow and the cost of borrowing, such as set-off facilities that allow credit on one account to offset a debit on another, reducing your overdraft charges. |
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| Negotiating The Terms Of Your Loan |
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| A loan agreement can be a long, complex document. How you agree a loan will impact on the health of your business. Remember that almost
everything is up for negotiation. Aside from discussing basic issues, such as the due date of the loan and the interest rate, you also need to establish what the loan fees are. Ensure that you will have the flexibility to pay off your loan earlier than the due date and try to avoid a penalty. Negotiate for a grace period for your payment schedule and check to see that late payment charges are practicable. |
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| If you use a finance broker, they will explain the main terms of different types of loan when choosing the most suitable loan type and lender with you. They will also negotiate the best deal for you. But it is a good idea to do your own homework, so that you can guide the negotiation. You also need to establish what fees, if any, the broker will charge you.
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