When Businesses Borrow Money, What Really Matters?

When Businesses Borrow Money, What Really Matters? When businesses borrow money, several key factors are important to them. It isn’t always about cost, it isn’t always about having to borrow. In no particular order, the top factors out clients talk about are: Interest Rates Cost of Borrowing: Lower interest rates reduce the cost of borrowing, […]

August 6th, 2024

When Businesses Borrow Money, What Really Matters?

When businesses borrow money, several key factors are important to them. It isn’t always about cost, it isn’t always about having to borrow. In no particular order, the top factors out clients talk about are:

Interest Rates

Cost of Borrowing: Lower interest rates reduce the cost of borrowing, making the loan more affordable and less daunting when borrowing

Type of Rate: Fixed vs. variable rates can affect future payments and stability. On the whole, borrowers tend to prefer fixed repayments so they can budget longer term

Loan Terms and Conditions

Repayment Period: The length of time over which the loan is to be repaid. Most unsecured borrowing is over a maximum of five years with businesses wanting to ensure payments are affordable on this basis and fit within the cash flow projection

Amortisation Schedule: How payments are structured over the life of the loan (e.g., equal monthly payments vs. balloon payments). This can be especially relevant with HP or car finance agreements

Loan Amount

Sufficiency: The loan must be sufficient to meet the business’s needs, whether for expansion, working capital, or other purposes. Borrowing too much or too little can be equally as bad

Collateral Requirements

Assets: The need to pledge assets to secure the loan, which can affect the company’s financial flexibility. This can often mean personal assets or property being given to support a loan, sometimes mitigating personal risk can be a high priority

Risk: Higher collateral requirements increase risk to the borrower if the loan defaults. There is always a level of risk, but that risk has to be commensurate to what is being borrowed or the purpose of the borrowing

Covenants and Restrictions

Financial Covenants: Conditions related to financial performance (e.g., maintaining certain debt-to-equity ratios) can be a big factor, especially when breaching allows the lender to renegotiate. Remember that these ratios are often measured based on what happens on that single year end date

Operational Restrictions: Limits on business activities, such as restrictions on additional borrowing or asset sales. These covenants can often be hidden within a loan agreement

Flexibility and Prepayment Options

Prepayment Penalties: Fees for repaying the loan early can affect the overall cost and flexibility. Many businesses will have cash surpluses at certain points which allow them to reduce borrowing

Restructuring Options: The ability to renegotiate terms if financial conditions change. Businesses generally want some assurance that the lender will work with them in the same way they expect any supplier to work with them

Approval Time and Process

Speed: The time it takes for the loan to be approved and disbursed. This is often the first priority of a borrower, how long does it take to get an offer and funds in my account

Simplicity: The complexity of the application process and the burden of required documentation. Historically borrowing from a bank can be protracted and many borrowers are put off by this

These factors collectively determine the suitability, affordability, and strategic fit of a loan for a business’s financial needs and objectives.

The good news for businesses is that the process and speed of finance has become quicker and better. There are also more options for businesses which enable them to spread their lending supplier risk.

For businesses who want to know their options then get in touch.

By Dave Farmer

David Farmer

Over 30 years finance experience. Former credit underwriter, founder of Lime Finance Solutions in 2012. Multi Award winning business, featured in Sunday Telegraph, Parliamentary Review, Sky TV and others. Regular contributor to press and business associations. FCA Authorised, ALIBF Qualified. Specialist in Commercial Mortgages, Business Lending, Property and Development Finance.