Low Interest Business Loans

 

When seeking financing, entrepreneurs of all backgrounds, whether they are new to their field or seasoned veterans, will often haggle over the lowest interest rate possible.

Who can blame these people? Saving money, especially now that we're still in a recession-like economic state, may be the key for their survival and future financial security.

It can sometimes be detrimental to base a decision Everest Business Funding about financing on the cost alone (in this case, its interest rate). Business decisions, especially those involving business loans, should be considered in their entirety. This includes both the benefits and the costs.

I will explain. In today's market any offer of a loan for a business - no matter how expensive - shouldn't be taken lightly because these transactions are rare. It is dangerous to think that the interest rate offered today is too high, and that there will be a lower one tomorrow. This is especially true in this sluggish economic climate and with lenders being so cautious.

 

If the decision to take out a loan for a business is based on the interest rate, it may not be something that the business needs right now or could lead the business down a path of unhealthy decisions.

Take a look at a common but simple business loan scenario. A $100,000 loan with monthly payments of 8% at a term of 5 years. The monthly payment for this loan is $2,028 per month. Let's assume the interest rate is 12%, instead of 8%. This would mean a higher monthly payment of nearly $200. This is a significant increase, nearly 10% more with the higher interest rate.

Most business owners who seek outside capital are swayed by the idea that a lower rate will mean more savings and a better choice.

What happens if your current lender refuses to lower the rate? What if there isn't another lender or loan with a lower rate? Does it remain a wise business decision?

The cost or interest rate of a loan is only one side of the coin and can have a negative impact on the viability of a business over the long term. You must also consider the benefits.

Imagine that the business could use that $100,000 loan to generate $5,000 more in monthly income. Is it important to know the interest rate? The nearly $200 difference is negligible (especially when compared over 60 months) and a better option would be to decline the loan with the higher rate, but lose out on $5,000 of new monthly revenue.

What if, instead, the business could only generate an extra $1,000 from the $100,000 loan? No matter the interest rate (8, 12, 50% or more), the business shouldn't even consider a loan.

Why am I bringing this up? I've seen businesses lose their future potential, or even harm their organizations, over a one- or two-percent increase in the rate of a business loan. We have been conditioned to believe that if the rate is not what we think we deserve, then the deal will be bad. This is far from the truth. These conditioning instincts are a result of competitors telling us that we can do better, or that we deserve to be treated better. But in the end we find out that they never work for our benefit.

This shows that business decisions can be more complicated than we initially thought. Early on, we are taught to bargain for the lowest price. For example, zero-interest car loans and "the lowest mortgage rate in decades". But in both cases one wouldn't buy a home or car (regardless the interest rate), unless there was a real need.

Business loans should be treated the same way. Business loans are assets and should be treated accordingly. The more business loan assets are used, the more revenue they generate. They should not be used to their maximum benefit (like all other assets) and instead, they should be redirected into a new use. This is a simple law of business.