Evaluate Lenders Effectively
One challenge for SMEs who are able to obtain finance from
banks (or other sources) these days is to ensure that they get terms that are
right for them.
By "terms" I don't mean just the amount of
finance, but also the period for which it will last, the purpose for which it
will be used, the price you will pay (interest AND other "one-off"
fees and charges), any security required and the legal terms and conditions
that will govern the finance.
In some cases, you may have little negotiating power (e.g.
if there's only one bank willing to lend). That still doesn't stop you from
covering the basics to ensure that you know what you're getting, how long for,
for what price, any special terms and conditions and what happens if things go
wrong.
We’ll assume that you have several lenders all of whom are willing
to lend. The only problem is, their proposals are all on different terms. The
first thing to do is reduce everything to the same common terms. Sometimes,
this is easy. Sometimes, you'll be dealing with phraseology that would baffle
the wisest of men. Lenders tend to look at things in their own way, and
although regulators are making a determined effort to simplify borrowers'
lives, things will only change very slowly.
The main items you’ll need to make sure of are:
·
Amount of loan;
·
Actual interest rate per annum* (you need
to convert so you can understand it);
·
Fees and charges – how much, when taken,
added to interest or not;
·
Term of loan (how long will it last);
·
Instalments and frequency.
* “Annual Percentage
Rate” (APR) is different to monthly rates.
For example, a credit card that charges 7.5% interest MONTHLY on an
outstanding balance is charging an EFFECTIVE interest rate of 138% per annum
due to the “compounding effect” of interest.
Don’t be afraid to ask questions and get the lender to
explain exactly what things
mean. After all, it’s your money that you’ll have to pay out.
A few of the key points to look at are:
1. Amount
- is it enough?
2. How
long for?
3. Does
forecast cashflow allow you to pay it off within the term agreed?
4. Interest
– fixed or floating? Charged monthly/quarterly/annually? In advance/in arrears?
5. Will
it be charged on the reducing balance of any loan, or on a "straight
line" basis?
6. What
other fees or charges are there, and when will they be taken?
7. Is
it payable in instalments, or "bullet" payments?
8. What
happens if you pay off early - are there penalty charges for this?
9. Under
what conditions can the lender demand full repayment? Are they within your
(reasonable) control?
10. What
security or covenants (other conditions) does the lender require and can you
meet them? Is it/are they reasonable,
given the circumstances?
Depending on the answers to these questions (and others that
you may think of) will you need to renegotiate?
Now flip this around, and before you go to a lender, work
out yourself what you can afford given your projected cashflows, etc. Which conditions will you accept? Which conditions could be “deal breakers”? This gives a great view of your negotiating
position.
Labels: Financial, Risk, Strategy
posted by William Martin @ 09:39
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