Sometimes a negative connotation is given to the loan, as if it were something to avoid or a last resort. It is true that it forces us to commit ourselves as debtors and exposes us to scrutiny by banks. But in turn, loans can be a powerful tool to manage and boost our business. Like any tool, its usefulness will depend to a large extent on our own ability to use it correctly. Like any tool, the usefulness of credit will depend to a large extent on our own ability to use it.
Using credit to train rationally and efficiently for the business involves being able to answer questions such as: is now the time to take a loan? Is financing really what I need to grow my business? How much do I have to ask for? Who?
If we address all these concerns at once, we probably overflow and get frustrated before we start. That is why we propose in this note to concentrate on the four basic elements that constitute a loan. Analyzing them one by one allows us to know what kind of credit we need.
1) Destination: Why you are going to use the loan is probably the most important aspect, because it conditions the way to approach the rest of the points. It is not the same to finance the purchase of a machine, a car or a new land. Regardless of the amount, the ideal condition is that it is the same loan that generates the basis for reimbursement. For example, if we are going to use the money to buy more raw material, it should be the sales of the finished product that generate the funds to pay the fees. There are different lines and types of loans according to the specific purpose.
2) Repayment time: Not always more term is better. The lender is likely to seek to reduce repayment times to minimize credit risk. But as recipients of a loan we must use the understanding of our company and industry to know in advance what would be a reasonable time for the quota to be accessible, without the refund extending unnecessarily over time. Do I need a grace period for the start-up of the machine that I am going to buy? What is the maximum quota that I can face? How is the fee regarding my cash flow?
3) Rate: It is essential to analyze the offers of several entities and search for lines of credit appropriate to specific needs, since they tend to offer better conditions (for example, production lines, which seek special benefits for SMEs). Some of the variants of the rates, or price of money, are whether they are fixed or variable, on what amounts are calculated and how they are expressed (nominal versus effective). Other costs that can be added to the rates must also be taken into account, constituting the Total Financial Cost (CFT).
4) Warranty: The banks may ask for guarantees of various kinds to ensure that the money will be returned. Can the goods that you buy with the loan work as such (e.g. vehicles)? Can you respond with other guarantees or do you have to look for offers that do not require guarantees?