Borrowing Money

Tips on trimming your borrowing costs.

Looking for the lowest interest rate on a loan for your newbusiness? It's more than just the interest rate that counts.It's the total borrowing costs. Here's the plan:

1. Trim the bank's perception of risk-and your interestrate-with a good business plan, excellent personal credit, relevantbusiness experience and quality collateral like multipurposeequipment and late-model vehicles.

2. Borrow the right amount. No more than necessary, but enough toget the job done. Use a cash-flow projection to frame your needsand plan repayment.

3. Avoid a loan with a prepayment penalty or with penalties forextra payments.

4. Hammer down upfront fees and points. These are just disguisedinterest. (100 points equal 1 percent.)

5. Don't build fees and points into the loan itself. This meansyou're paying interest on interest.

6. Look for a loan that charges daily simple interest based on a365-day year, not on a 360-day year.

7. Lenders may require you to keep some percent of the loan amounton deposit with them. Usually this is a bad deal. Offer to pay ahigher 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 astatement of the annual percentage rate (APR) and how it wascalculated. This will help you measure one lender againstanother.

9. Don't get upside down. You must earn more in your businessthan you're paying in interest. Profits after all expenses butbefore taxes (PBT), divided by the total assets of your business,should be greater than the APR on the loan. The same is true of PBTdivided by the total equity in your business.

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