When most entrepreneurs begin the process of seeking a company loan, one of the first concerns that occupy their thoughts may be the cost of the loan — namely the interest rate they will be charged.
As you already know, just getting a lender to think about your business loan request is difficult enough nowadays — but, to get someone to provide your business capital at a rate that you feel is the most beneficial to your operations is utterly impossible.
Every single day I recieve requests from entrepreneurs (start-up or established business owners) who wish to know where they can get a cheap business loan.
My response is always exactly the same — define cheap.
No loan is affordable but on the other hand no loan is expensive either — if it is offer proper use.
The main difference from a few percentage points on the loan isn’t any t nearly as meaningful as what’s completed with the borrowed funds proceeds. Business loans are meant to be a leveraging asset — meaning that you leverage current cash flow to acquire a loan then use that loan to create more in new revenue than the loan costs.
Thus, a loan is just an asset to be used by a business in its operation or mission to generate more cash and wealth.
Let us take a simple example:
You and also another local competitor have identified a market niche that may potentially create new ways to use your present products. Although this marketplace is yet unproven, both of you think that it has tremendous potential.
You go to your lender seeking a business loan for $100,000 for three years. The lending company agrees and quotes a rate of 10%; making your monthly loan payment approximately $3,227.
You are feeling that this rates are excessive because of the long relationship you’ve had with this lender and all the money you have paid for them through the years. Plus, you spent a couple of hours online researching that the average business loan rates are around 8%.
Your lender claims that he might be able to get your rate reduced to 8% but you’ll need to hold back until their next loan committee in 2 weeks to get it approved.
At 8%, you monthly loan amount would be approximately $3,134 — a $93 per month savings or $3,351 over the life of the loan over the 10% rate for the similar amount.
In the meantime, your competitor goes to the same lender and receives a loan quote for the same amount at the 10% rate. Your competitor takes the offer.
When the borrowed funds committee approves your 8% rate — your competitor has executed its marketing strategy for this new market, has established interest in its products and it is now generating yet another $10,000 monthly in new revenue out of this niche.
Once your loan is funded, you are trying to execute your marketing strategy but find that you really are a bit too late as well as your clients are only able to generate $4,000 per month in additional revenue (your products is viewed as a copy cat to the new market leader — your competitor).
While this new revenue will pay for the borrowed funds — the brand new revenue generated for the business is still some $6,000 per month lower than your competitor.
Let’s look at the main difference. Over 3 years, the total amount that you have to repay for the loan is $112,811 ($3,134 times Three years). Your company earns $4,000 per month for all those same 36 months and you earn $144,000 with a net profit of $31,189.
Your competitor spends more about his loan — $116.162 — but earns some $360,000 or net profits of $243,838 or 782% greater than your business all because you wanted an inexpensive loan.
The conclusion here is that the cost of the loan really did not matter here. The cost that your business taken care of not receiving into this niche before your competitor is much higher (a loss of some $6,000 per month in revenue) then the $93 per month you saved.
Should you compare his rate of 10% to the profit he made of some $6,773 per month ($10,000 — the payment per month) — his loan really was the cheaper one.
And, it really does not matter should you actually had a competitor trying to beat you to definitely the market. There is an opportunity price of not taking a business loan or by not receiving it once the time is appropriate.
Even though you were just delayed a couple weeks while fighting for a lower rate — the amount of income that you simply lose by waiting (a sum that you can never make up as time doesn’t go backwards) would exceed the number you were attempting to save — in this case, (should you did not have a competitor beat you to definitely the niche) waiting fourteen days would cost about $5,000 in new revenue when you were only obtaining a savings of $3,351 at the lower interest rate.
Now, That does not mean that you should not try to obtain a better deal or lower interest rate but, ensure that by doing so you are not quitting more then you are attempting to save.
Thus, while you squabbled over a few percentage points searching for that what are known as cheap business loan, the price you taken care of not getting the loan on time by far exceeded any potential savings.