Questions to Ask Before
Signing a Business Loan
Courtesy of Tom Ploskanka C.P.A.
Are you thinking of taking out a loan to buy new machinery or additional inventory for your business? Before you sign that loan document or credit application, consider the following questions:
What’s the true cost of borrowing? The interest rate on your business loan may be variable, fluctuating over the life of your loan. Calculate the impact of potentially higher future payments on your ability to pay other debt, such as amounts you owe your vendors. Include fees in your assessment. Your lender may ask for loan origination fees, application fees, administrative fees, and fees for gathering financial information about your company. Consider intangible costs too, including how long you have to wait before the loan is finalized and what opportunities you’re missing while waiting.
How will the loan be secured? Your lender will most likely require you to provide collateral, meaning you’ll be asked to pledge assets as security to ensure loan repayment. If you’re unable to pay the loan back, you run the risk of losing those assets. In some cases, you can use your business inventory or accounts receivable as collateral. Keep in mind those assets will be unavailable for other business borrowing. Alternatively, depending on the size of your business, you may have to use personal assets, such as your house or cash savings, as security. Make sure you have assessed the risk of loss before finalizing the loan.
Can you wait to make the purchase? Saving for purchases may be old- fashioned, but you’ll be investing in your business, with no lender to repay and no interest expense or other fees. In addition, you retain control of all your assets. Here again, opportunity cost will play a role in your decision, as you may miss out on taking advantage of good deals or possibilities for business growth.
When you’re ready to evaluate your financing options, give us a call. We can help you make the right choice.
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Rent or Buy?
It’s A Matter of Perspective
The buy-or-lease question is a common dilemma, whether you’re asking as a homeowner, or for your business. For perspective, think of the big picture. In eithercase, you’re paying for the exclusive use of an item over a set period of time. With that as a point of reference, the difference boils down to two main considerations: cash flow and exit strategy.
The cash flow associated with buying a home is straightforward. After making a down payment, you commit to a long-term obligation. Purchasing a home also offers a tax deduction for interest and real estate taxes. In contrast, renting may mean a monthly payment lower than what you’d pay on a mortgage. However, as a renter, you generally won’t benefit from tax breaks.
Business owners receive a tax deduction whether the final decision is to rent or to buy, but the timing of the deduction can vary. Lease payments are generally deductible over the life of the lease. Purchasing offers an immediate tax write-off in the form of accelerated depreciation or Section 179 expensing. The time value of money can play a role in your decision, as money you have today can be worth more than the same amount in the future.
What about exit strategy? When you rent a home, you know you’ll likely have to move at the end of your lease term, and you won’t benefit from any increase in real estate values. Home ownership has the potential for an increase – or decrease – in the value of your investment. This is especially true the longer you intend to stay put.
Exit strategy can be less of a decision factor for your business, especially if your policy is to keep equipment until it wears out. Do you routinely replace old equipment? A lease might offer an advantage.
Need help resolving the rent-or-buy decision? Contact our office for an in-depth analysis.