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A business loan is more complex than a mortgage: there are more variables, so advice on source banking on how to best manage risk is a very good idea. Some people think that they want a loan with the lowest interest rate, but these loan options often lack flexibility and may require monthly repayments. You also need to understand the seasonal cash flow fluctuations to determine if you want a loan with monthly, quarterly or annual repayments. Ask your banker to answer the question: “How can I manage this fluctuation and what loan gives me the flexibility to save money in the less profitable parts of the year?” Find out also: “Can I set a loan interest rate? If interest rates begin to change, can I fix a loan without making any changes to the contract and penal costs?” And ask for a loan. For example, if this is a financing agreement, do not take a ten-year loan to buy business equipment that you will use for three years.
Common loan issues
Many companies have different sources of money, and bankers can work on the structure of the loan in these circumstances. For example, if you are a salesman, December and June are the peak times for making cash, while other periods of the year are dedicated to buying maxima. A larger overdraft facility may be needed when in basic expenses mode, as cash may not return for the next three or four months.
Minimize exposure to potential interest rate increases
Specify the maximum interest rate that the company can withstand. Do computer modeling. If interest rates rise to X percent, how will this affect your business and are you still earning enough? Find out how much risk you want to take with interest rates. Some loan products with a variable interest rate allow setting a percentage limit. For example, you can set it to eight percent. In this way you get a variable, but with the protection of a set upper limit. Work with business bankers to structure risk minimizing credit products, but also make sure you understand the cycles. Forecasts for interest rate increases are already included in the agreed rate. Consider combining fixed and variable rates.
More and more companies want to have more freedom in crediting – but you have to remember that in order to use this flexibility you usually have to pay higher fees. However, for everything to go as it should, best adapt your business plan to your credit strategy.