Will This Loan Better or Bury Your Business
Capital is a crucial part of running a business. Some are fortunate to have enough cash reserves from which to pull need funds, but most have to use borrowed money until their business can produce sufficient revenue to sustain itself. This is common in business, but we must be mindful of the loans we take. There are loan terms that better our business and there are loans that bury our business.
I receive countless business loan applications and solicitations. Some of them are reasonable, but most come with a noose attached. A few that I’ve seen would violate usury laws, which is excess of 36% interest, but because they are fee based, they escape through the loophole. There are also loans with lower interest rates, but require repayment in such a short amount of time, they could well be high interest also.
For example: A lender may offer you a $5,000.00 loan with a 10% fee, but impose a 6 month repayment term, with weekly payments. You’ll pay roughly $230 per week until the loan is repaid. That’s nearly $1,000.00 per month. You may ultimately find yourself in a worse financial situation than you were in prior to taking the loan.
If you think that one is bad, I recently reviewed one that required daily payments for 60 days. They would generate a 50% profit within 60 days. This sort of capital is extremely expensive. They aren’t structured to help you win the day. Just say no!
A good loan should better your business. The terms should be such that you see an offsetting or greater rate of return from the loan. If you’re purchasing inventory for resale, the revenues generated from the sale of those goods should be sufficient to cover your cost of goods sold, your loan payments, enough to pay yourself and maybe a little profit. If the loan will not accomplish this end, you should consider walking away.
If you’re borrowing funds simply to pay bills, then you have no way of making a return from the loan, especially if those bills are ongoing. Unless you have a plan by which you’ll generate more revenue, the loan will only worsen your situation. You’ll have the same bills you had prior, but with a new loan payment added to it.
I’m a realist. I get it! Sometimes a loan is the only means by which we can keep moving forward. This is a factor on which predatory lending depends. Rather than bury your business and possibly yourself, get creative. See if there are other avenues by which you can raise the needed capital. Ask other business owners what they’ve done in similar situations. All money isn’t good money. Make sure the loan is a win for you and your business!
Written by: Eric L. Lipsey