When most entrepreneurs begin the entire process of seeking a business loan, one of the first concerns that occupy their thoughts may be the price of the borrowed funds - namely the eye rate they will be charged.
While you already know, just obtaining a lender to consider your business loan request is hard enough these days - but, to get someone to provide your company capital at a rate that you simply feel is easily the most good for your operations is utterly impossible.
Every single day I get requests from entrepreneurs (start-up or established business people) who want to know where they are able to get a cheap business loan.
My response is always the same - define cheap.
No loan is affordable but on the other hand no loan is expensive either - if it's offer proper use.
The main difference from a few percentage points on a loan is no where near as meaningful as what is done with the borrowed funds proceeds. Loans are meant to be considered a leveraging asset - and therefore you leverage current cash flow to obtain a loan then use that loan to create more in new revenue compared to loan costs.
Thus, a loan is just a good thing for use with a business in its operation or mission to generate more income and wealth.
Let us take a simple example:
You and another local competitor have identified a market niche that could potentially create new uses for your present products. While this market is yet unproven, both of you believe that it has tremendous potential.
You go to your lender seeking a business loan for $100,000 for three years. The lender agrees and quotes an interest rate of 10%; making your monthly payment approximately $3,227.
You feel that this rate is too high given the long relationship you have had with this lender and all the money that for them over the years. Plus, you spent a few hours online researching that the average business loan rate is around 8%.
Your lender states that he may be able to get your rate reduced to 8% but you will 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 monthly savings or $3,351 within the lifetime of the loan within the 10% rate for the same amount.
In the mean time, your competitor goes to the same lender and gets to be a loan quote for the same amount in the 10% rate. Your competitor takes the deal.
By the time the loan committee approves your 8% rate - your competitor has already executed its marketing plan with this new market, has established interest in its products and it is now generating an additional $10,000 per month in new revenue from this niche.
Once your loan is funded, you are trying to complete your marketing plan but find that you really are a bit too late as well as your clients are only in a position to generate $4,000 monthly in additional revenue (your product is viewed as a duplicate cat to the new market leader - your competitor).
While this new revenue pays for the loan - the brand new revenue generated for your business is still some $6,000 monthly lower than your competitor.
Let's look at the main difference. Over 3 years, the quantity you need to repay for the loan is $112,811 ($3,134 times Three years). Your company earns $4,000 per month for all those same Three years and also you earn $144,000 with a net gain of $31,189.
Your competitor spends more on his loan - $116.162 - but earns some $360,000 or net profits of $243,838 or 782% more than your business all since you wanted a cheap loan.
The conclusion here's that the cost of the loan really did not matter here. The price that your business taken care of not getting into this niche before your competitor is much higher (a loss of revenue of some $6,000 monthly in revenue) then your $93 monthly held on.
Should you compare his rate of 10% to the profit he made of some $6,773 per month ($10,000 - the monthly payment) - his loan really was the cheaper one.
And, it truly does not matter should you actually were built with a competitor attempting to beat you to the marketplace. It comes with an opportunity cost of not implementing a company loan or by not getting it when the time is right.
Even if you were just delayed a couple weeks while fighting for any lower rate - the amount of income that you lose by waiting (an amount that you could never make up as time does not go backwards) would exceed the amount you were trying to save - in this case, (if you was without a competitor beat you to the niche) waiting two weeks would cost about $5,000 in new revenue while you were only obtaining a savings of $3,351 at the lower rate of interest.
Now, I am not saying that you should not try to get a better deal or lower rate of interest but, make sure that in so doing you are not giving up more then you are trying to save.
Thus, when you squabbled over a few percentage points searching for that what are known as cheap business loan, the price you paid for not receiving your loan on time by far exceeded any potential savings.