The Burden of Borrowing
Your growing company could be hindered by hidden loan costs if you don't look ahead.
Like many growing companies, Safe Handling Inc., a transportation and warehouse services business in Auburn, Maine, has relied on a range of credit during its 12-year history: funding for equipment purchases, working capital loans and term debt, often from multiple lenders. While meeting each creditor's reporting obligations is time-consuming, the bigger concern is how these collateral issues could jeopardize future funding for the $5 million-plus company. It has even paid off loan balances rather than allow a lender's requirements to stifle growth. "We are mindful of the alternative of paying off a lender to maintain simplicity for growth," says CFO Bill Howell. "We need to be positioned for future borrowings to fund growth, and we can't do that with onerous collateralization requirements."
Often, the indirect costs of borrowing, such as burdensome collateral conditions, have more impact on a growing business than the loan itself. A bank may require the borrower to keep a certain percentage of the outstanding loan balance in an account, for example, or charge a penalty if any of the loan principal is prepaid. Even firms with straightforward financing needs should bear in mind that a variety of factors determine the cost of a loan, not just interest rates and fees a lender charges for reviewing and preparing documents.
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