Becoming well-versed in the subject of interest rates can be a real asset to your business. Interest rates vary and definitely affect the cost of doing business.
With interest rates on the rise, consumers pay more interest to lenders and your business may find customers have less disposable income to spend. Businesses with variable interest rate loans may find themselves in tough situations and it may be difficult to take out new loans to manage expenses or expand the business.
Interest Rates: The Cost of Doing Business
Can a borrower utilize points or lender credits with a business loan? The answer is yes, and the advantages / benefits are much the same as they are for personal loans.
Buying points on a commercial loan can lower monthly repayments and potentially save your business money over the life of the loan. Lenders may offer better interest rates and terms to borrowers who buy points. Points can benefit companies which are just starting out, having cash flow issues, and in many cases, point fees can be tax deductible. Be aware however the purchase of points may require a large upfront cash payment. For example, one point is usually calculated at 1% of the total loan amount so one point on a $1 million dollar loan costs $10,000. If the loan is only for a short term, then any interest savings may be small and not worth the upfront fee.
If your business is well established and has a solid monthly cash flow, then you might consider removing upfront costs by getting lender credits. By removing these upfront costs as a result of lender credits, you agree to pay a higher interest rate and higher monthly repayments. If your loan amount is high, then removing closing costs and fees could represent large initial cash savings but result in higher payments. If your loan term is short, then any additional interest charges may be low or manageable.
Lenders use points and credits to cover the risk and costs associated with originating a loan. Different lenders offer varying interest rates and terms so it’s a good idea to check with a number of lenders to find the best deal for your company.
If you’re considering using points or lender credits, make sure you understand the impact they will have on your monthly repayments and cash flow. It’s always a good idea to have an attorney review a loan contract before signing.
Is There an Advantage to Buying Points or Using
Lender Credits on a Business Loan?
If you’ve ever taken out a personal mortgage, you’ve likely heard of loan points or lender credits. Loan points are fees paid by a borrower to reduce the interest on a loan, while lender credits reduce or remove closing costs on a loan in exchange for the borrower paying a higher interest rate.
What is the Cost of a Capital Infusion to Boost Profits and Increase Margins?
A capital infusion—also called a capital injection—is the process of putting funds into a business. The terms “infusion” or “injection” implies that the funds are a financial lifeline for a start-up or struggling company. While this can be true, capital infusion (or injection) refers to any type of one-off financial investment in a business.
Capital infusion may be required several times over the life of a company for different reasons and from different sources—cash, equity, or debt. You may need cash in a start-up phase to hire staff and buy equipment, obtaining seed funding from private or angel investors. Later, your company may fund growth by offering equity to investors in the form of shares or taking on debt through loans and lines of credit. If a business is struggling, a capital infusion can purchase inventory, pay salaries or other costs, get a company through a downturn, or even keep it in business.
However, there are downsides to capital infusions. If your business takes on debt, or uses a line of credit, you need to ensure your cashflow allows you to make repayments. Otherwise, you risk a lower business credit score or even bankruptcy. You may be restricted in how you use capital or have to satisfy additional reporting requirements to a lender. Angel investors and venture capitalists will want a stake in your business and may seek management or Board positions. (This can be an upside as such investors can bring a wealth of experience to your company.) However, you’re also giving up some control in your own business.
In addition, while capital infusion can boost profits and increase business margins of a company, it can also weaken the book value—the difference between assets and liabilities. A cash infusion can inflate actual earnings which are an important factor in determining business valuation. Investors use book value and share price to determine good investment candidates. A weaker book value can deter investors or adversely affect stock prices.
E-Finance Management: Capital Infusion: https://bit.ly/3YlIPva
Entrepreneur: How Strategic Capital Infusion Works: https://bit.ly/3VXbOE2
Investopedia: Capital Injection: https://bit.ly/3j4js0U
Investopedia: What is Book Value?: https://bit.ly/3HAkqfn
Smart Capital Mind: What is a Capital Infusion?: https://bit.ly/3ByR9y3
Put Away the Credit Card!
Slapping down a credit card to pay for business expenses seems like an easy way to cover costs, but experts agree it’s not the smartest or most cost-effective solution.
Even though credit cards are small business owners’ favorite go-to for financing, you should be wary about relying on credit cards as a funding source.
Most credit cards have high-interest rates when compared with a loan from a bank or alternative lender, which means the financing fees hike up your balance. Business owners should also pay attention to fluctuating rates. Most business cards come with a variable APR, which means that the amount of interest you pay on the card balance can increase or decrease depending on the prime rate. If interest rates increase, your payments could also increase. Very often the convenience of a credit card can actually result in double or triple the interest rate you might get from a line of credit provided through different lending channels.
And the fees! Many credit cards include annual fees, fees for foreign transactions, expenses for cash withdrawals, and late payment fees. These add up, and, if not paid off, equal debt. Business owners holding credit card debt often are ineligible for more attractive financing options, so the convenience of quick credit can actually hold your business back.
While the use of credit cards for small items is perfectly acceptable (think office supplies or dinner with a client), relying on credit cards for investment-type purchases is not always a fit for credit cards. Larger purchases like new office equipment or real estate can tie up your credit line, damage your credit score, and incur greater interest fees if they are not paid off each month. It all affects your bottom line, your ability to grow, and manage your debt-to-income ratio.
Tired of the extra expenses and high rates, consider long-term solutions like SBA loans or factoring for your funding needs.
CPA or Bookkeeper? Which is the Right Fit for My Business?
There are a couple of options to consider when managing the finances of your small business. Who keeps the books? Who prepares the taxes?
A bookkeeper records and maintains financial data in a physical or online ledger for a business which may include:
reconciling records with bank statements
submitting employee payroll
running weekly or monthly reports
tracking customer transactions
managing business purchases.
Bookkeepers may not have formal accounting training, but they are adept at money management, data entry, payroll, and finance. Many are knowledgeable about specific types of bookkeeping software, payroll systems, data analysis software, and POS systems.
A certified public accountant (CPA) holds a degree in accounting as well as a certification earned by passing an exam, thus giving them accredited experience in accounting. In addition to handling operational financial tasks and many of the functions of a bookkeeper, CPAs can provide:
Tax preparation, planning, and filing
Advice about financial regulations
Audit & IRS representation
Advise on annual budgeting
Financial reporting and statements
CPAs often handle more complex fiscal tasks, while bookkeepers manage the day-to-day business financials.
If you’re seeking help with both daily operations and tax preparations, an on-staff CPA may be your best bet. Another option is to hire a bookkeeper full-time, likely at a lower rate, and consult the expertise of an accountant during tax time or during milestone events like M&A, recapitalization, or seeking to take a company public.
Click to watch webinar on Interest Rates:
The Real Cost of Doing Business
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