So, you would like to take out a loan. Perhaps you are looking to buy a new BMW for yourself, perhaps you would like to buy a new piece of equipment, or you might be using your loan for some commercial real estate. I hope that whatever you are considering using your loan for, you have given it lots of careful consideration.
A loan could be a great way to get what you want right now – we all love instant gratification – or a loan could help you make some great changes in your business. And, if you can get and afford a good loan for these things, you are in great shape. You should simply make sure you are getting the best deal that you can under your circumstances. But, if your credit is poor or if you might not be able to pay your loan, you are taking on a great risk. There is no reason to mimic the United States and get yourself into a devastating amount of debt.
When you are applying for a loan, you are not the only one taking a risk. A creditor is also taking on a large risk when agreeing to a loan. As a result, they take great care in evaluating your credit. They rely on something called the five “Cs”: character, capacity, capital, collateral, and conditions. In Warren, Reeve, and Fess’ Corporate Financial Accounting, they describe these “Cs” clearly. In short, character refers to the likelihood that the loan will be honored. Capacity is the ability to repay the loan. Capital refers to the value of the business. Collateral is the value of assets that the business is willing to give the creditor in the event that they cannot repay the loan. Lastly, conditions refer to the current economy and their expectations – it may be very difficult to repay a loan in an economic recession or depression. With that said, you should take at least as much care as the creditor does when determining whether taking a loan is in your best interest.
If you are not second guessing yourself and still want a loan, having some specific information on hand can help you move through the process a little more quickly. A well organized plan that accounts for the aforementioned variables and knowing how much money you will need and how it will be used can be very helpful.
In the case of a business, a commercial loan may make the difference your company needs to grow. Perhaps a commercial loan will help you buy the real estate you need or some important commercial machinery. This machinery or real estate could make all the difference for your business.
I live in a rural area and, when I was still in high school, I put up the fencing at a horse farm and for a couple of people in town. I started off digging the post holes with a shovel. It was hard work and it was slow. When I started renting a tractor with an auger from a friend, my job went much more quickly. I figured that my productivity approximately tripled when I started using the tractor. It made all the difference in the world for me.
I had no plans of continuing with the job for very long so I never invested much capital. Developing my fence construction job into an elaborate business was not even a consideration. If I had, however, a commercial loan may have been just the way to do it. I would have considered buying my own tractor and auger. I would need a way to transport the tractor and auger and other expenses such as advertising would certainly add up. It would have been much more than I could afford for a couple of years to come. However, considering that I could approximately triple my productivity with the machinery would mean I could make much more this year and each of the following years. It would have been a great situation for a commercial loan.
In short, be careful when you are looking at taking out a loan. They may be able to get you what you want, right now but that doesn’t mean that it is in your best interests to take out a loan. In some cases, however, a loan, especially a commercial loan, can be a great idea and give your business the jump start or finances it needs to prosper. Whatever your reason for taking out a loan may be, make sure that you have a plan.
By David Wade