Category: Video Spotlights

Video Spotlight: Low Interest Business Loans

 

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Transcript – Provided and/or Formatted by BorrowStar

Regardless of the state of the economy, all entrepreneurs, either new at their trade or old hats in business, when seeking financing, tend to get caught up in haggling over the lowest possible interest rate that they can achieve. Who can blame them? Cost savings – especially while we are still experiencing recession like economic symptoms – may be the key to their business’s survival and their personal financial future. But, sometimes, merely basing a financing decision on just its cost (its interest rate in this case) alone can be even more detrimental. All business decisions should be taken in the whole – with both benefits and costs consider simultaneously – especially with business loans. Let me explain: In today’s market, any offer of a business loan – regardless of its costs – should not be taken lightly given the fact that these business transactions are hard to come by.

Thinking that this interest rate is too high and that a better one will come along tomorrow may just be destructive thinking as nothing may come along tomorrow – especially in this continued sluggish economy and all lenders being overly cautious. Further, if the business owner’s decision hinges so much on the rate of the loan, then maybe a business loan is not something the business truly needs at this time or may be a decision that just spirals the business further along an unhealthy path. Example: Let’s take a simple but common business loan situation. A $100,000 loan for 5 years with monthly payments at 8% interest. This loan would require monthly payments of $2,028 for the next 60 months. Now, let’s say the interest rate was 12% instead of 8%.

This would result in a monthly payment of $2,225 – nearly $200 per month higher. A significant increase – nearly 10% higher with the larger interest rate. This is what most business owners, when seeking outside capital tend to get caught up in – the lower rate means more savings for the business and thus a better decision. But, what happens if the current lender will not lower the rate from 12% to 8%? Or, if another, lower rate loan / lender does not come along? Is it still a good business decision?

Looking at the cost of the loan or the interest rate is purely one sided and could potential affect the long-term viability of your business – the benefits of the loan also have to be weighed in. Let’s say that the business can take that $100,000 loan and use it to generate an additional $5,000 in new, monthly business income. Does it really matter the interest rate at this point as the nearly $200 difference in the rate is really trivial (especially over the months period) compared to possibly declining the higher rate loan and getting nothing in return (losing out on the $5,000 in new revenue per month). Or, what if the business would only be able to generate $1,000 in new, extra income from the $100,000 loans? Then no matter what the interest rate (8%, 12% 50% or higher), the business should not even be considering a loan in this situation. Why do I bring this up?

Simply because I have seen business after business either lose out on their future potential or fatally harm their organization over a mere one or two percent increase in a business loan rate. We are just conditioned to think that if we do not get the rate we feel we deserve – then the deal is bad for us. That can not be further from the truth. Know that these conditioning instincts we tend to have are more from the fact that competitors (those other lenders seeking our business) tell us we can do better or that we deserve better – but in end only finding out that those ploys never really work to our benefit. The lesson here is that all business decisions are more complex then we may initially think or been lead to believe. We are taught from very early in life to negotiate for the lowest costs – like zero interest car loans or buy now with “the lowest mortgage rates in decades” – either case, one would not buy a car or a house (regardless of the interest rate) if there was not a great need – a need that provides more in benefits then its costs.

The same should be done with business loans. Loans are merely an asset to a business and should be treated as such. Business loan assets should be used to generate more in revenue than they cost – the more the better. If they are not being used (like any other business asset) to generate the greatest benefit that they can generate, then they should be pulled from whatever use they are currently being employed in and put into use that will generate the greater benefit. It is simply a law of business. Thus, merely focusing on only one side of a business decision – the interest rate for a business loan decision – can have an unforeseen, adverse affect on the business – creating more harm then good.

The entire situation should be taken into advice before a decision is made. In fact, in the case outlined above, the interest rate can increase as high as 56% for the 60 months before the cost would outweigh the benefits – provided there were no additional costs associated with the loan. In my experience, I have always found it much easier to look at the benefits first (like the increased monthly revenue that can be generated) then search out the lowest costs options to receive those benefits. But, as stated, this is essentially opposite of what we tend to be taught in our society or in our markets (remember the zero percentage auto loans – which have the lost interest revenue built into the price). But, sometimes the best entrepreneurs think outside the box and tend to go against any conventional wisdom we may have been subject to – mostly for the benefit of others and not ourselves. Therefore, when seeking a business loan and finding yourself fighting hard for a small decrease in your interest rate – be sure to step back for a moment and look at the entire picture – as a low interest business loan may not be in the best interest of the business in all circumstances.

 

Video Spotlight: SBA Lending- Advantages and Disadvantages of Financing with SBA Loans

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Transcript – Provided and/or Formatted by BorrowStar

Welcome back! Today, we’re talking about business financing. Specifically, using a U.S. Small Business Administration loan, or an “SBA Loan” through a local bank to obtain financing for your business. My name is Thomas Rockwood, and if you have any questions whatsoever about SBA financing or would like more information about getting access to capital for your business, please feel free to reach out to me directly at any time at Thomas@LifeForth.com. Specifically, today, what I wanted to talk about was some advantages and disadvantages of using an SBA Loan for the solution of funding your business. Whether it’s a business acquisition, you’re trying to get capital for an existing business, Or there’s a specific transaction you’re trying to pull off such as purchasing real estate, or expanding your location buying equipment, buying inventory, any of those things. Ultimately, I think that there are three reasons why businesses choose an SBA Loan over conventional lending or alternative finance. And I think that comes down to Cash injection or the equity requirements that involved, the term of the loan (how long you have to repay back that loan), and then the types of transactions you are trying to pull off.

Whether it’s buying a business, starting a new business, purchasing real estate buying equipment or inventory or just needing working capital. All of those things will have different appetites at different banks. One of the first things I think it’s important to look at is is the loan request that you’re trying to do for your business, is it eligible at the SBA? And then, after you get to a “Yes, okay. This is SBA eligible,” then it comes down to: “Is this is something that the bank wants to do?” Do they have the appetite to actually fund that type of transaction or that industry? Or given the factors of your cash injection or the term you are looking for, is that something they are interested in doing? Once you’re in that space and you are saying, “Okay. I have an eligible request.” Now, it comes down to appetite, then I really think you are looking at different banks as a solution, as opposed to eligibility and looking at it from the SBA side.

Advantages, specifically. Why would you want to look at an SBA Loan? There are advantages and disadvantages to every type of financing. So, we’ll start with what would really benefit your business. And I think that typically comes into the amount of cash you have to put the transaction. For example, If you are trying to buy or start a business, Typically, a bank’s gonna want to see cash injection There might not be specific regulation or direction from the SBA, in the SOP that says, that says you must have this specific cash injection amount. And in that case, you really dealing with bank appetite. I don’t see a lot of 100% financing anymore.

So, you know, a good rule of thumb is if you start with 20% or so of the project to inject, then I think you’re heading in the right direction. If you have less than that, , 10%, you might lose a few banks’ appetite but I still think it’s an eligible request depending on the type of business and what you are trying to do. You know, cash injection requirements are really going to be bank by bank. And that’s going to be something that you’re going to want to look at and assess as you’re looking at your lender. The other thing to really consider is the term of the loan. In a business acquisition scenario, the SBA will allow for a 10-year term. If you are trying to buy real estate, You can extend up to 25 years. Those are typically beyond what I would say the normal conventional loan would allow or what an alternative financing would allow.

The term of the loan is really a key component because that’s gonna spread your payments out over that much period of time and allow for the lowest possible payment on a month-by-month basis for your business. Whether you’re starting up or expanding that direction. So, the terms of the loan, I think, are a key advantage. And depending on what you’re trying to do, if you’re involving real estate or heavy equipment that has a long life, a useful life, you can get 20 to 25-year financing options, and there’s different loan programs that you can participate in. The third main advantage of using an SBA Loan is really going to be the types of transactions you’re able to do. A lot of conventional lending? They want to have tangible assets. If you can’t touch it, it’s probably not going to be financeable.

So, a lot of conventional lending is around equipment, around real estate, and they might do some lines of credit around your receivables. But in the case of a business acquisition, if you are buying a business and you are a new owner in that business? That might be a very tough transaction to find a lender to do conventionally. Alternative financing might not be an option because you don’t have a historical track record. So, the SBA Loan is a great tool to make that business acquisition, and it really provides the bank the incentive to say, “yes.” Say, yes to this transaction. Help this buyer make this acquisition and get this ball going for this company. Franchise start-ups Start-ups are also a tough one to pull off simply because you don’t have historical revenues. So, a franchise that’s eligible with the SBA, it’s a good option to use an SBA Loan to fund that start-up cost.

There’s a lot of start-ups that don’t have franchises. There’s specific regulation you’re going to want to talk to someone about your specific business you’re trying to start-up But I think that’s a great example of also a type of transaction that falls outside of the conventional financing option and outside of the alternative financing and falls well within the SBA. So, again, when you’re looking at SBA Loans, some advantages are always gonna be the amount of cash you can put in is gonna be probably lower than that of alternative or conventional financing. You can probably get longer terms which is gonna get you a lower monthly payment. And the types of deals you’re trying to put together…. If you are trying to do a lot of different things, such as, you’re starting a business that’s gonna need a lot of equipment, real estate, and working capital, plus you’re gonna need inventory. All of those things are eligible to be financed with the SBA Loans. So, depending on what you’re trying to do or how broad you need your financing to cover, SBA Loans have a good reach.

So, there’s a lot of talk about the disadvantages of an SBA Loan. We’ve gone through some of the advantages. You know, I think, commonly what I hear is: that either there’s too much paperwork or it takes too long or it’s too heavy on the fees. And I guess to address some of those, I think a lot of it has to do with you know, as you start your process with an SBA lender at a bank, I think your experience is going to be heavily dictated by who you are working with. The experience of that lender and of that bank doing SBA lending. Working with the right lender up front is going to help you set your expectations, it’s gonna map out the timeline it’s gonna take to pull of your specific transaction. And I think that’s gonna be the probably the most satisfying piece for your experience going through the SBA Loan process. There are checks and balances, and there’s a process to an SBA Loan.

It doesn’t matter which bank you go through. We all have to go through the exact same regulation and the exact same process for the most part. So, talking with your banker up front, and understanding what that is going to be– having that expectation set and laid out for you– is gonna make your experience much more pleasurable. The fees? The fees are the fees. I don’t think it varies too much bank-to-bank. In most cases, most lenders come in at about the same cost. The main advantage I see is going with an SBA Loan to cover those fees.

A lot of conventional loans, they don’t cover the closing costs. They don’t cover the environmental, the appraisal, the closing attorney, any of those other pieces. So, SBA Loan proceeds can cover that. The SBA also has programs– so, if you are a business and you are a 51% veteran-owned business or more so, if you are a service veteran, there’s fee reductions currently in place. And at the time of your loan application, you’re gonna want to talk to your lender about what those are. But on some loans, they waive the fee entirely. So, for the service you’ve put into our country, the SBA tries to at least reduce those fees where we can and help you get your business up and running and off the ground. I appreciate your taking the time to watch the video.

Take a look at the rest of the videos when you get a chance. If there’s a specific topic you’d like me to cover, please let me know. Again, my name is Thomas Rockwood and you can reach me directly at Thomas@LifeForth.com. Next time, we’ll be talking about some of these topics more in depth. So, check out some of those videos. Look at the other videos on the website, and hopefully, this helps get you in the right direction in terms of getting your business financed.