Regardless of the state of the economy, when finding funding, all entrepreneurs, whether new to their trade or seasoned veterans, appear to get caught up in haggling over the lowest possible interest rate. You can learn more at Car Finance Broker Near Me
Who are we to blame them? Saving money – particularly now that we’re still in the midst of a recession – might be the difference between their company’s survival and their personal financial future.
However, basing a financing decision solely on its expense (in this case, the interest rate) may be even more damaging. All business decisions should be considered holistically, with all benefits and costs taken into account at the same time, particularly when it comes to business loans.
Let me explain: Given the scarcity of business transactions in today’s market, any offer of a business loan – regardless of its costs – should not be taken lightly. Thinking that this interest rate is too high and that a better one will appear tomorrow is dangerous thinking, because nothing will appear tomorrow – particularly with the economy still stagnant and all lenders being cautious.
Furthermore, if the rate of the loan is so important to the business owner, a business loan may not be what the company wants right now, or it may be a decision that leads the company down an unhealthy path.
Consider the following scenario for a basic yet typical business loan. A $100,000 loan with annual instalments of 8% interest for 5 years. For the next 60 months, this loan will entail $2,028 in monthly payments. Let’s pretend the interest rate was 12 percent instead of 8%. This will result in a $2,225 monthly bill, nearly $200 more per month. With the higher interest rate, there was a substantial rise of nearly 10%.
When looking for outside money, most business owners get caught up in the idea that a lower rate means more savings for the company and therefore a better choice.
But what if your new lender refuses to reduce your interest rate from 12 percent to 8%? What if there isn’t another, lower-rate loan or lender available? Is it still a smart business move?
Looking only at the loan’s expense or interest rate is one-sided and can have an effect on the company’s long-term viability; the loan’s advantages must also be considered.
Let’s say the company will take the $100,000 loan and put it to good use, generating $5,000 in new monthly revenue. Is the interest rate really that important at this stage, given that the nearly $200 difference in rate is negligible (especially over the 60-month period) compared to probably declining the higher rate loan and receiving nothing in return (losing $5,000 in new monthly revenue).