Financing and Loans

Overview

Chapter 11 delved into the world of financing and loans. In it we discussed the value in financing different aspects of your business.We analyzed the typically expenses of a business to determine how much financing you are going to need.We reviewed the different types of business loans and determine which ones will best meet your needs. We then explained what predatory loans are and how to avoid them. An exploration of the general loan criteria used by most lenders was made, followed by an exploration of the general loan process used by most lenders.We then explored the different uses for loans. Then we dissed SBA loans and how to go about qualifying for them.Lastly,we explored other financial resources that could help your business.The following exercises will help reinforce the concepts presented in the textbook.

Key Terms

Annual percentage rate

The interest rate for a whole year, rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate.

Annual percentage yield

real rate of return earned on a savings deposit or investment taking into account the effect of compounding interest.

Wet Signature

Older version scoring system, most widely used in credit card lending

Lien

an action taken by an owner of a debt to keep possession of property belonging to another person until a debt owed by the borrower is discharged.

Origination Date

The initial date on which the proceeds of the loan or other extension of credit was physical awarded to the loan recipient.

Origination Fee

A fee charged by a lender on entering into a loan agreement to cover the cost of processing the loan.

Variable interest

(sometimes called an “adjustable” or a “floating” rate) is an interest rate on a loan or security that fluctuates over time because it is based on an underlying benchmark interest rate or index that changes periodically. If the underlying index rises, interest payments increase.

Variable interest

an interest rate that moves up and down with the rest of the market or along with an index.

Maturation Date

(aka maturity date or the termination date) the date on which the principal amount of a note, draft, acceptance bond or other debt instrument becomes due and the loan must be paid off in full. If the loan is being repaid through an installment agreement, it is the date that the last payment is made completing the repayment of the loan.

Cost of Equity

The return a company requires for an investment or project, or the return an individual requires for an equity investment.

Cost of Capital

the opportunity cost of making a specific investment. It is the rate of return that could have been earned by putting the same money into a different investment with equal risk. Thus, the cost of capital is the rate of return required to persuade the investor to make a given investment.

Compound interest

(aka compounding interest) interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan.

Amortization

an accounting method to demonstrate the periodic lowering of a debt usually delineated by principal and interest over the course of a loan.

Equity Injection

The injection of equity in the form of cash to stimulate growth or reduce debt. Equity injection demonstrates an investment on the part of the business owner or investor in order to provide a commitment for a larger loan.

Leasing charge

(aka Lease fee) an ownership interest held by a landlord with the right of use and occupancy conveyed by lease to others; usually consists of the right to receive

Cost of debt

the effective interest rate a company pays on its debts. The cost of debt often refers to after-tax cost of debt, which is the company’s cost of debt before taking taxes into account. However, the difference in the cost of debt before and after taxes lies in the fact that interest expenses are deductible.

Compound interest

the numerical value that is calculated on the initial principal and the accumulated interest of previous periods of a deposit or loan. Compound interest is common on loans but is less often used with deposit accounts.Unlike simple interest, compounding interest is calculated periodically and the amount is immediately added to the balance. With each period going forward, the account balance gets a little bigger, so the interest paid on the balance gets bigger as well. Put simply, it is interest on interest.

Rate of return

The net gain or loss on an investment over a specified time period, expressed as a percentage of the investment’s initial cost. Gains on investments are defined as income received plus any capital gains realized on the sale of the investment.

Fixed interest rate

An unchanging rate charged on a liability, such as a loan or mortgage. It might apply during the entire term of the loan or for just part of the term, but it remains the same throughout a set period

Debt Schedule

A methodology that lays out all of the debt a business has in a schedule based on its maturity, usually used by businesses to construct a cash flow analysis.

Underwriter

The person who actually decides whether to issue you the loan.

SBA

an autonomous U.S. government agency established in 1953 to bolster and promote the economy in general by providing assistance to small businesses. One of the largest functions of the SBA is the provision of counseling to aid individuals trying to start and grow businesses.

SCORE

A resource partner with the SBA. The SBA administers a Congressional grant which provides SCORE with funding. SCORE volunteers work with the SBA to provide small business mentoring and training to entrepreneurs through SBA offices.

UCC: The Uniform Commercial Code

A standardized set of laws and regulations for transacting business. The UCC articles govern various types of transactions, including banking and loans.

UCC Filing

A UCC-1 financial & legal statement a lender files with the secretary of state when they have a security interest against one of your assets. It gives notice that the lender has an interest, or lien, against the asset being used by you to secure the financing.

Predatory Loans

any unscrupulous actions carried out by a lender to entice, induce and assist a borrower in taking a loan that carries high fees, a high-interest rate, strips the borrower of equity, or places the borrower in a lower credit rated loan to the benefit of the lender.

Balloon Payment

payment method in which small payments are made during the course of a loan, often only the interest, and the remaining principle balance is paid in one lump sum at the loan maturation date.

Lien Positioning

The order of priority position of different lenders on a loan or asset. When a lender is in a first lien position, it means that they are in the first or priority position to benefit from any liquidation of the collateral, which secures the loan, in the event that the loan is in default and the property is to be sold.

Interest Rate

The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding. More simply, it is the money you pay to a lender for the privilege of borrowing money from them.

Expected Outcomes

Financing equipment is among the best ways to free up working capital for your business.
The true cost of a business is far greater than you realize. Having a clear spreadsheet noting revenue and expenses will help ensure you anticipate costs and are prepared for unforeseen expenses.
There are different loans for different business needs. Consult your bank’s loan rep to determine which type of business loan you should apply for.
Predatory lending is any lending business that imposes unfair or abusive loan terms on a borrower. It is also any business that excessively solicits and convinces a borrower to accept unfair terms through deceptive, coercive,exploitative or unscrupulous actions for a loan that a borrower doesn’t need, doesn’t want or can’t afford.
Lien positioning gives the lender the rights to the collateral of the loan. If there is no physical collateral, the lien may be placed against the business.
Most lenders use a similar criteria for assessing loan eligibility, however each lender will also have their own specific requirements.
Since most lenders follow similar criteria, you can assemble a packet that you can just resubmit to each new lender.
The interest rate is the amount a lender charges for the use of assets expressed as a percentage of the principal. The interest rate is typically noted on an annual basis known as the annual percentage rate (APR). The assets borrowed could include cash, consumer goods, or large assets such as a vehicle or building.
UCC filings or liens are legal forms that a creditor files to give notice that it has an interest in the personal or business property of a debtor. UCC lien filings allow

Key Concepts

The whole credit score system is a big game and it is important for you to know how to play it.
A credit score is your credit history expressed as a number.
Credit scores are used by lenders to make determinations to lend you loans and credit, and what the terms of the offer will be.
The 3 major credit bureaus are Experian, Equifax, and Transunion
The Fair Credit Reporting Act (FCRA) is a federal law that defines how credit bureaus are supposed to operate. Under the FACT you have a right to a free copy of your credit report once a year.
FICO is a major analytics software company that provides products and services to both businesses and consumers. There are different types of FICO scores used for different types of loans.
The 3 major credit bureaus created Vantage Score in 2006 to compete with FICO
Credit score factors are weighed by lenders to get a picture of your lending risk level and your ability to repay the loan. Different lenders weight different factors differently.
Consult a credit repair service or attorney to be sure your credit report is accurate and in good standing without any negative blemishes.
Use certain strategies to improve your credit score.
Banks look at many additional factors including your capacity,collateral, and conditions.
Use the start up of your practice to establish new good business credit.
Remember, the credit score system is one big game. You need to learn how to play it, and you need to follow their rules.a lender to formally lay claim to collateral that a debtor pledges to secure their financing.
SBA loans are government-backed loans that can provide long term financing at a low interest rate.
SCORE is a 501(c)(3) nonprofit organization that provides free business mentoring services to prospective and established small business owners in the United States.
A business plan is crucial for starting and running your business successfully. It is the blueprint for your business. One of the most important reasons to write your plan is that you may be held accountable for the projections and proposals it contains.
When traditional loans are not an option for you, there are numerous other resources to procure financing for your business.

Chapter Slogans

Banks only lend you money when you don’t need it!
Don’t create any Red Flags!
Pay for what you can, finance what you must.

POUND THE PAVEMENT

When you are at a business that is comparable to the one you are planning, look at various machines, devices, and setups. If there is something you really like, ask the staff or owner what the brand is and what kind of deal they got it for. For example, if you love the coffee at a certain coffee house and want to know what type of espresso machine they use, you can ask if that equipment makes the coffee great. You may find out it is not the machine at all, but the type of coffee bean, or the method of roasting. This can help you determine if getting that machine is right for you.

Curriculum

Financing and Loans

Overview

Key Terms

Annual percentage rate

Annual percentage yield

Wet Signature

Lien

Origination Date

Origination Fee

Variable interest

Variable interest

Maturation Date

Cost of Equity

Cost of Capital

Compound interest

Amortization

Equity Injection

Leasing charge

Cost of debt

Compound interest

Rate of return

Fixed interest rate

Debt Schedule

Underwriter

SBA

SCORE

UCC: The Uniform Commercial Code

UCC Filing

Predatory Loans

Balloon Payment

Lien Positioning

Interest Rate

Expected Outcomes

Key Concepts

Chapter Slogans

POUND THE PAVEMENT

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