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The best loan is one that has a low rate, a
minimal impact on cash flow -- and doesn't require you to hock your
car if the loan goes south.
Dear Small Biz Adviser
What is the best type of loan for $450,000?
Can you tell me some pros and cons on government
loans?
Borrower
Dear Borrower:
The best business loan, from the borrower's point of view,
offers:
- The lowest possible interest rate;
- A payback period that places the least burden
on company cash flow;
- The least amount of exposure of personal
assets; and
- Provides the greatest leverage to use the
funds as you want.
When preparing your loan application, project
a cash flow statement of at least three years, and up to five years
if the term of your loan equals or exceeds that time period.
That will also demand that you develop profit
and loss projections. The expense is incurred at or before you pay
the bills. Payment of receivables and the note payable directly
impact cash on hand before and after making payment.
You need to know how much cash is available
to cover operating overhead, any stockholder dividends and coverage
for unanticipated expenses. Then determine your current and quick
ratios.
Bankrate.com provides a Ratio
Calculator to assist you. Additionally, you can access the Loan Calculator to learn
the total monthly P&I (principal and interest) payment required,
depending on the term and interest rate of your loan.
Exposure of personal assets is very important
to consider and clarify when negotiating a loan. Ideally, you want
your corporate entity to be liable for repayment of the loan. It
is not uncommon, however, for the small-business owner to put up
personal assets as collateral for a business loan.
Once the personal assets are exposed, the corporate
legal entity will no longer protect them from liquidation should
you default on the loan. Please read the fine print on any loan
application documents to be certain of this exposure.
Finally, the one general category for which
allows leverage in how loan proceeds are used is working capital.
Otherwise, the proceeds are tied to the purchase of a specific item.
In turn, that item will most likely be declared as collateral against
the loan.
A loan instrument too often ignored by the borrower
is the line of credit. This instrument makes a specific amount of
money available to you when needed. You are held liable for repayment
and interest expense only on that portion used, and for which you
have yet to make payment. It reduces interest expense and your liability
to only that portion of the money accessed.
As for the pros and cons of government loans,
it is best to note that a government-guaranteed loan is really a
promise that if you default, Uncle Sam will repay the bank the amount
it fails to collect through normal repayment procedures or liquidation
of collateral.
Typically, the Small
Business Administration will issue the bank a guarantee on 75
percent to 90 percent of the loan. In other words, federal tax dollars
will be used to partially cover the bank's exposure on the loan.
SBA loans are jointly approved and issued by
the SBA and their affiliated, certified banks. The loans are typically
approved for low-risk to no-risk applications. Do not make the mistake
of believing these government-backed loans are directed to high-risk
ventures.
The SBA has several types of loans, depending
on your needs. The most common loan programs are:
Finally, be aware that most SBA loan guarantees
will require you to sign a waiver that exposes your personal assets
to liquidation if the loan is defaulted, and the cost of acquisition
and sale of the designated collateral does not cover that portion
defaulted. In other words, if you default on the loan, the bank
has the full backing of the SBA to acquire personal assets and sell
them off to collect the full amount of the outstanding balance.
You will also pay the bank's costs of acquisition and sale of those
assets.
So do your homework, ask all the questions and
read all the documents.
Bankrate.com writers base their answers on our editorial
content and advice of financial professionals. We make no claims
or representations about the accuracy, timeliness or completeness
of such content, advice or the answers provided to you. Our content,
advice and answers are intended only to assist you with your financial
decisions. However, by its nature such information is broad in scope.
Your financial situation is unique, and our content, advice and
answers may not be appropriate for your situation. Accordingly,
we recommend that you get different opinions and seek the advice
of your accountant and other financial advisers before making any
final decisions or implementing any financial or investment strategy.
-- Posted: June 2, 2000
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