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Financing your business: Guidelines for the first-time borrower

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Borrowing money can help you do things – start a business, expand and diversify, buy new machines, stock up on critical materials, put up your own factory or store, etc.  However, borrowing can also be complicated and risky.

Borrowing can make life easier for you in running your business, but it can also get you into trouble if you don’t manage it right.

The following guidelines may be useful especially for first-time borrowers:

  1. Learn how loans work.  You will see that most loans get paid off gradually over time. Each monthly payment is split into parts: a portion of it repays the loan balance, and a portion of it is your interest cost. An amortization table shows how loans work this way, and how interest costs go down over time.  Once you have a good idea how loans work, ask yourself:  “Can I afford the payments, including the interest?”  Remember that the money you spend on interest is gone for good.
  2. If you decide to go for it, anyway, the next step is to size yourself up if you are in a good position to borrow.  Find out if you can be considered a “good credit risk” and can pass a bank credit investigation process.  It is also important to show that you have a good credit reputation. Be prepared to put up collateral in the form of land, building, equipment, motor vehicle, and other valuables.  If you have none, will someone be willing to lend you collateral?  Do you have the requisite documents to show, e.g. income tax returns, financial statements, permits, etc.?
  3. Estimate accurately the amount you need to borrow.  It is important not to underestimate the amount required.  You are better off borrowing a bit too much than too little.
  4. Choose the bank from which to borrow.  Generally speaking, the bank to approach must be one that knows you and understands your business best.  It should also preferably one that is near your home or place of business.
  5. The choice of bank must also be determined by the size and purpose of the loan as well as the size and status of your business.
  6. In comparing banks, find out about the following terms or conditions.
    • Repayment period, including grace period
    • Interest rate and processing charges
    • Mode of release of funds, whether in lump sum or by installment or tranches.
    • Mode of repayment – whether monthly, quarterly, semi-annual or annual installments.
    • Collateral and equity requirements

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