Borrowing may have a negative connotation; however, it is an excellent way of financing projects requiring substantial money. If you are a startup, borrowing is not only something you cannot run away from but is also a necessity.
Often people make the mistake of borrowing without understanding the actual cost of the loans they borrow. Unfortunately, such kind of borrowing puts you at the risk of getting a poor deal.
If you are looking to take a business loan, this guide can fill you in on determining the actual cost of the loan and ensure that you make an informed decision.
What options of borrowing do you have as a business person?
When planning to take out a loan, you need to weigh the options at your disposal. Borrowing options can vary from one business person to another depending on several factors, such as the years a business has been in operation and the type.
When setting up a business, you may realize that accessing a business loan can be challenging because your company has yet to build credit. Under such circumstances taking a personal loan can be an option for financing your business.
But if your business has been around for some time, accessing financing may not be as complicated. However, exercising caution is essential to ensure you get a good deal. If you are not sure where to start, this business loans comparison resource can help you make an informed decision.
Negotiating for low-cost loans
The actual cost is the total sum of fees and interests you pay on top of the money you borrowed. A loan’s annual percentage rate (APR) is the best measure of the cost of a loan.
The APR is your amount of credit per year. However, the APR may not include all costs, for example, penalties, but it is the most reasonable indicator of the cost of a loan.
Fees
When most people take a loan, they only think about the interest rate, and rightly so because the interest rate is a factor in the cost of a loan. However, it is not the only factor you should pay attention to. A loan comes with several fees that may escape your attention but can significantly affect the loan’s cost.
Some of these fees include:
- Packaging fee. Borrowing involves a lot of paperwork and requires the borrower to provide information about their business such as finances, other debts, revenue generated, expected revenue, etc. Sometimes the requirements may be complicated, and you may require a third party or the lender to help with the process.
Third parties and lenders will charge a fee for such services. Therefore when calculating the total cost of a loan, you need to know exactly how much it costs.
- Application/processing fee. Before the lender can approve a business loan application, they usually conduct a background check to establish your business and personal creditworthiness. These processes cost money that is passed on to the borrower.
- Underwriting fees. After a loan application package is complete, it goes through the lender’s underwriting department, where the provided information and the risks associated with the application are verified. This process will also incur a cost.
- Closing costs. Closing costs are primarily associated with mortgages, and these costs include title fees and realtor’s fees.
- Maintenance fees. These are fees charged on an ongoing basis to the lender to cover the cost of sending invoices, handling payments sending out notices, etc.
Interests
Interests play a significant role in the cost of a loan. The higher the interest rate, the higher the cost of your loan will be. The type of interest on your loan matters as well. There are two main types of interest rates; fixed-rate and adjustable/variable rate.
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Fixed-Rate
If you take a loan on a fixed-rate plan, the percentage interest on your loan remains the same throughout your loan repayment period, even when market rates change. The good thing about fixed interest is that you know what you sign up for from the word go.
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Adjustable/variable rate
If you choose the variable interest rate option, you may start with lower market rate interest rates. However, the rates can fluctuate while still below the set interest rate cap. If the cap is raised, your interest rates can rise too. If you love predictability, this option may not favor you.
The loan term
The term of the loan can impact its cost. Taking a long-term repayment period may seem like a pleasant idea since you will be required to pay manageable installments.
However, choosing a long-term means trading convenient installments for increased overall loan cost. You may want to confirm the effect time will have on the cost of your loan strike a balance between convenient installments and the cost you are willing to bear.
Negotiating for low-cost loans
While lenders may have a preset interest rate for loans issued, there may be room for negotiation depending on the collateral and your creditworthiness. However, no bank will tell you this secret, but now you know.
There is stiff competition in the lending scene, and lenders know they could lose you to a competitor, so they may agree to lower your rates by a small margin. However, you should not expect too much when negotiating. Even a minor drop in rates can make a big difference in the total cost of your loan.
Penalties
You commit to making monthly or weekly installments without fail when you take a loan. However, you could miss a payment or make a late payment. The lender will likely penalize you for the missed or late payment. Therefore, it would help to understand the penalties involved.
Final Words
For some people, taking a loan is inevitable. But, it is essential to ensure that you have a clear understanding of the actual cost of your loan. You can start by looking at the factors listed in this post and weighing the options you have to identify what is fair for you.
