S.T.E.P.S. – Smart, Tailored, Event-Driven, Packaged Solutions
Evaluating a Loan — Part III
You should evaluate loan possibilities carefully — the same way you would examine any financial transaction — so you can make the best choice possible for your business. Different criteria to consider include:
Let’s take a closer look at each.
Lender requirements
When applying for a loan, remember that it is not just you in the interview seat; you should also be evaluating your lender. Loans can vary widely from lender to lender, and all loans should be scrutinized carefully.
Regardless of the kind of loan you’re looking for, the federal Truth-in-Lending Act requires that lenders provide you with certain basic information that is key to your ability to evaluate them. Some of the most important facts they must present are:
- A list of all charges that your payments cover, such as taxes, fees, penalties, and finance charges
- Length of any grace period offered before payment must be made
- Expected repayment schedule
- Rules governing when the lender can seize your security deposit and collateral in the event that you default
Interest rates
The interest you pay on your loan is one of the most important factors to consider when evaluating the packages you are offered. Different loan sources can provide different interest rates on loans. Loans are issued with either a fixed or variable interest rate:
- Fixed – Fixed-rate loans guarantee that you pay a fixed rate of interest for a specified period of time.
- Variable – Payments on variable or adjustable rate loans fluctuate based on the movement of an underlying index. When you’re looking at an adjustable-rate loan, be sure to understand the index to which it is tied. If it’s a particularly volatile one, then be sure you can afford to weather the ups and downs you’ll likely face.
HerTip: When you’re thinking about interest rates, keep in mind that the time you have to pay back the loan plays an important role. The longer you have, the lower the interest rate you should expect to find.
The role of the lender
Lenders supply the cash you need, but many lenders offer more than just money – whether you like it or not. Understanding where and who your funds are coming from is crucial to both the success of your loan agreement and your business at large. If what you want is a silent investor, then that is what you need to solicit, and banks are a good place to start. On the other hand, taking loans from family and friends is usually the easiest way to raise funds. But be careful — this type of lender can often influence your business more than you would like.
If you are looking beyond the banks for your loan and are considering other outside investors, there are a number of services they can provide in addition to cash. These include:
- Business counseling and development advice
- Technology – computers, phones, faxes, and the like
HerTip: Some investors can often help grow your business at an accelerated rate – for a price. They typically provide these kinds of services in exchange for equity in the company. Be sure to consider how much you’re willing to surrender before making an agreement of this kind.