By George M. Dawson
Q. How do I get the lowest interest rate on a loan for my framing and art supplies shop?
A. It's more than just the interest rate. It's the total borrowing costs. Here's the plan:
1. Trim the bank's perception of risk--and your interest rate--with a good business plan, excellent personal credit, relevant business experience and quality collateral like multipurpose equipment and late-model vehicles.
2. Borrow the right amount. No more than necessary, but enough to get the job done. Use a cash-flow projection to frame your needs and plan repayment.
3. Avoid a loan with a prepayment penalty or with penalties for extra payments.
4. Hammer down upfront fees and points. These are just disguised interest. (100 points equal 1 percent.)
5. Don't build fees and points into the loan itself. This is paying interest on interest.
6. Look for a loan that charges daily simple interest based on a 365-day year, not on a 360-day year.
7. Lenders may require you to keep some percent of the loan amount on deposit with them. Usually this is a bad deal. Offer to pay a higher interest rate and skip the "compensating" balances. Interest costs are a tax-deductible business expense. Idle funds earn you nothing.
8. When you have the final proposal from the lender, ask for a statement of the annual percentage rate (APR) and how it was calculated. This will help you measure one lender against another.
9. Don't get upside down. You must earn more in your business than you are paying in interest. Profits after all expenses but before taxes (PBT), divided by the total assets of your business, should be greater than the APR on the loan. The same is true of PBT divided by the total equity in your business.
Please don't get hung up on the interest rate. Why haggle over a few dollars and lose a loan your growing business needs? Borrowing the right amount and setting an affordable repayment schedule are more critical than interest expense. Free financial calculators at http://www.wheatworks.com can help you figure monthly payments and loan APR.
Albitz/Miloe & Associates, (310) 373-8861