Financial assistances are often necessary for a business organization. This article discusses those factors.
The Cost of Finance
By cost of finance, one would refer to the expenses one would have to incur to arrange for the finance as well as the percentage an entrepreneur will have to incur. Therefore, assessing the cost of finance is very important while arranging for the finances.
When you decide to arrange for finance from the bank, the institution will be charging a certain percentage of interest. This interest will thus be the finance cost that the business will have to bear.
A businessman can get the interest deducted from his profits and thus save himself from taxes. For the equity finance cost, one must be prepared to pay the maximum percentage.
This is because equity finance is the costliest finance source available. But, one will always have the option to not be committed to the payment of fixed annual interest. Hence, one can be free to use the money he has borrowed without being tensed about the repayment of the loan he has obtained from Equity Finance.
The common rule is to fund a long-term need with long-term loans and arrange short-term funds for short-term needs. But, it is nothing hard and fast. One can obviously flex the rule and go for the long-term borrowings where a number of short-term needs are to be funded.
Security and Covenants
Here, by security one would refer to the assets that one can put forward as a mortgage when you intend to arrange for finance for your business. Generally, banks ask for collateral when you apply for a loan. The collateral must be something of real worth and thus businesses come up with their assets.
Covenant will mean that the lender is free to incorporate a provision that you are liable to pay the interest out of your profits before the payments to the equity holders are forwarded. Now the considerations are to be made if you can actually accept these provisions and honor them.
For businesses, which have already borrowed some kind of a loan and need to make further borrowings, will have to plan the transaction according to the time by when the existing loan matures.
Also, you must make arrangements for paying off the existing loan. That is equally important. What you can do is refinance the paying back of the loan or go for any other convenient option.
It can be clearly made out that there are more than just a few considerations to be made. It would depend upon the circumstances faced by the business and how necessary is it for the business to get the money.
In addition, the purpose of the loan is very important. The best thing an entrepreneur can do is be prepared for the worst possibilities. One must be very attentive and stay updated about the market conditions.
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