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Business loans: what traps await entrepreneurs

Very often, especially novice entrepreneurs, they face the problem: what to finance the development of the company from. An editorial over at http://www.fivecountyfair.org/motorcycle-loan-bad-credit-guaranteed/

Entrepreneurs choose two paths. Either they focus on slow development financed from the surpluses generated by the company, or they are looking for investment credits and loans that can accelerate the development process.  

Looking for investment credits and loans

Looking for investment credits and loans

The second path is chosen by most companies because entrepreneurs know that they need to respond quickly to changes in the market and few of them can afford to wait for what the competition will do. Reckless loans, however, can be a cause of trouble and a reason for falling into credit traps.

Depending on the purpose for which the loan is intended – purchase of equipment and technologies, construction of facilities, purchase of another company – the loan is granted for up to 10 years. It’s been a long time, so it’s worth thinking carefully about which of the many banks offers to use so that you don’t become a hostage of the bank later.

Not everyone will receive an investment loan

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There are industries that banks do not want to support with loans. Beginner entrepreneurs do not have great opportunities for support from the bank. Those who meet the initial banking criteria must be patient and prepare for the administrative path through suffering.

That is why, when the bank’s final decision is positive, many entrepreneurs do not load into the provisions of the contracts, glad that at all there was a bank that decided to finance their business plans. It can have fatal consequences.

The point is that the loan should finance the company’s growth and not increase the income of the banks. So what should you pay attention to so that the decision to take an investment loan is not the worst in the history of your own company?

Margin and commissions

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The amount of the margin is important because it applies throughout the entire loan period. However, its borders can be tried to negotiate and it must be done. Similarly, you should negotiate and enter in the contract the possibility of commission-free early repayment of the loan or part of it.

Interest

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Another important variable when calculating loan profitability. The entrepreneur has little influence on the interest rate because it is determined on the basis of GFIC indicators. Offers at individual banks may differ by several percent, which is why it is worth looking for the best offer on the market.

Credit collateral

Credit collateral

The bank will demand collateral for the loan and everyone must be prepared for it. While finding guarantors is not too annoying, the bank may propose provisions in the contract that will be very unfavorable for the company. These include wording that prohibits the encumbrance of the company’s assets to other creditors or provisions forcing the bank’s consent to incur liabilities in other institutions.

This binds the hands of an entrepreneur who could have the opportunity to finance other projects in cooperation with other financial institutions.

The provisions which give the right to terminate a loan by a bank in a situation in which the entrepreneur does not pay his liabilities to institutions other than the bank are extremely unfavorable. This may be, for example, USD, to which the entrepreneur will not pay contributions for his employees.

You should also be careful about the wording in the contract, which only transfers to the entrepreneur the risk of market disturbances and is the burden of the costs of these disturbances.

It is also worth eliminating a blank promissory note from the bank’s security system – an extremely dangerous tool in situations of conflict with a bank.

What is worth taking care of?

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The entrepreneur should push for solutions in the contract that will allow him to suspend repayment of installments and interest on them for some time if market events unfold in an unfavorable direction.

For several years in which the loan will have to be repaid, the market situation may change so much that it will be difficult to pay back debts. Then the bank’s violent reaction may deepen the company’s problems or lead to its collapse.

You should also suggest a loan repayment date. It may be that there is one main contractor with whom the company cooperates and that pays its receivables within a specified time. It is worth setting the repayment for the bank in such a way as to take this into account and not to pay unnecessary penalty interest for even several days late payment of installments.

You should not be afraid of loans. However, before you use them, it is worth – especially if you run a small company without a finance department – take advantage of the advice and opinions of credit advisors.

A professional company will easily find in the maze of fine print rules that are unfavorable for the borrower and will look for the best offers on the market.  

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