Criteria For A Business Loan
What Needs To Be Accomplished When Acquiring A Business Loan
There are lots of criteria that needs to be met when applying for a business equipment loan. You need to be aware of many variables. Part of the process means learning from those who have come before you. There are lots of mistakes many make the first time around. The idea is to learn from these mistakes.
The Interest Rate
If you think you know how to calculate the rates, think again. There are so many who assume they are correct when they aren’t There are those who have spent their whole lives working in the business world who get it wrong.
Here is an example:
Say you have a loan of $1,000. Let’s say you pay back $1,100 over a 3 month period. Say you are making these payments every week. Some would assume that this about 10%. If you are assuming this, you would be wrong. The best way to know is by looking at the time frame. When you look at the time frame, it’s actually about 80%.
How do businesses get this wrong? They take the APR and divide it by the amount borrowed. They look at the APR as the total fee. This is the incorrect way of doing the calculations. What you need to do is take the interest and base it on the amount that is outstanding. Take a look at the amount that is outstanding at every point in time.
If you are a small business, you need to look at the optical. The above APR is 8 times more then the optical. This is example is the reason why some businesses end up miscalculating so much.
This is the second thing which trips people up all the time. There is one fee that is completely ignored. This is the origination fee. Lenders tend to charge between 3-4% at the time of the loan. This fee is taken away from the loan amount.
Now here comes the kicker.
The longer you take to pay it all back, your true interest will go up. You are compounding the original interest. Keep this in mind when you go to pay it all back.
Say you have a 40% upfront fee for a $1,000 loan. This is only going to be 4%. This is going to through off your original APR. This will screw things up for you; especially, if it’s only a short-term thing.
This can end up costing you big time later on.