An entrepreneur will always require financing, either to start the business project, or to strengthen and expand their company. The vast majority of the time, you will need to go to a financial institution to apply for a business loan. But because there are many possibilities in this market, it is best for you to avoid making a hasty decision and ponder your choice of financing. In many cases, private financing may be the best route to take and Randall Castillo Ortega, the founder of RACO Investment, explains how to make the right decision when choosing the best financing option as a small-business operator.
When evaluating and comparing the different banks or financial institutions that can give you the required credit, it is essential that you review a wide range of factors to choose the financial offer that best for your business. If you’re looking for and comparing different commercial loans, interest rates are one of the most important factors to consider. It’s hard to know which interest rate is favorable if you don’t have other references to compare. Asserts Castillo, “The average interest rate on commercial loans is no longer what it was ten years ago, when banks were less stringent and approved most applications. Today, traditional lenders have stricter requirements, and companies often seek financing from other sources. It’s vital to know the interest rates you can expect when applying for a commercial loan.”
Before extending credit, lenders will analyze the use. It is important to define what to use (working capital, remodeling, acquisition of real estate, growth) because this depends on the type of loan to be sought. Check if you are a credit subject, as some lenders evaluate only companies’ cash flows and others evaluate their ability to pay, based on their financial statements. If your financial structure isn’t very well, the options are reduced.
The total cost of financing, known as effective cost, is the most important criterion to look at when comparing different alternatives. This element refers to the true rate you’ll have to pay for the loan, and is made up of the interest rate, plus other additional costs that are typically included in the loan, such as grant or maintenance costs.
The term is the period of time that the financial institution gives you to repay the loan and pay the interest. “To choose according to your payment capabilities,” states Castillo, “it will help you understand the following: in the shorter term, the interest rate is usually lower, but the higher the fees to be paid; while if the term is longer, the interest rate will also be, but lower the fees to be paid.”
The rate can be a fixed interest rate, a variable interest rate, or a combined rate. Fixed rates remain constant for the duration of the loan, variable rates are adjusted according to certain parameters, and combined rates usually start with fixed rates and then become variable rates. Fixed fees allow you to know in advance what the fees will be and therefore give you the control and security of knowing how much you are going to pay. While variable rates present the uncertainty that they can increase at any time, but are usually lower than fixed rates.
Determine if there are any early cancellation fees. Consider whether the credit gives you the possibility to make additional payments in order to reduce the debt, or cancel it in advance of the deadline granted. In addition, the financial lender is likely to evaluate your customer service. Explains Castillo, “This can be gauged by your willingness to provide all the information you require, your ability to address any concerns you have, your speed to evaluate the application and to give you the loan, among other things.”