Choosing the Right Lender for Your Business Finance
In last week’s blog, I examined the three common mistakes business owners make when they’re applying for business finance.
As I said last week, there are many lenders to choose from. As a result, the questions then become: What is the best funding option for my business? And who is the right lender?
Over the years that I’ve been arranging business finance, the most common question I’m asked by business owners looking to raise finance is: What will the interest rate be?
Now of course, interest rates are an important factor in choosing any funding option, however it’s important to understand interest rates are not the “be all and end all” and are certainly not the only consideration when it comes to choosing the right lender for your funding requirements.
So, let’s look at some of the key areas to bear in mind when you’re looking to raise finance.
As I’ve just said, interest rates are not the “be all and end all” when it comes to raising finance, nevertheless they are an important consideration to which you need to give some thought.
Obviously, you are looking for the cheapest rate, but you also need to decide if you want to have a variable rate of interest which will be linked to base rate, or do you decide to take a fixed rate of interest and if so, for how many years?
These are important considerations that you need to think about and perhaps take professional advice. Many clients want certainty and as a result, I’m finding at the moment, that many of my clients are choosing the option of a 5-year fixed rate deal.
Personally, I would probably do the same. As a business owner it gives you the “peace of mind” of knowing that your monthly repayments are fixed which means you can get on with the important job of running your business
The amount you pay each month is arguably more important than the interest rate you are being charged.
Let me explain. The monthly repayment is the amount you pay the lender each month to service the loan and of course it is paid directly out of the cash flow of your business each month.
So, whilst having a good interest rate is important, I would argue that having a monthly repayment that you can afford is far more important.
Let me illustrate my point:
- A loan of £250,000 at base rate + 3.5% over 10 years = monthly repayments of £2,550.
- A loan of £250,000 at base rate + 4% over 20 years = monthly repayments of £1,615.
Now which is the best deal?
Based solely on interest rate, then the first option at base rate + 3.5% is the better deal. However, it’s no deal at all if your cash flow can’t afford £2,550 per month.
In which case, option two over a 20 year term becomes the better deal for you.
And the term of the loan is not the only consideration. Does capital repayment work for you or would interest only be better?
If you choose interest only do you want the flexibility of being able to repay capital sums without penalty.
And what about early repayment charges? Some lenders don’t charge them at all; whilst others levy hefty charges for partial or full redemption, particularly in the first 5 years of the loan.
Are seasonal repayments important to you? I had a client recently who owned a Guest House in the West Country, for whom seasonal repayments were vital. Having given the client some funding options, they chose a lender who was slightly more expensive on interest rate but who offered the flexibility of monthly repayments that were structured to meet the seasonal nature of the client’s business.
In summary, of course the interest rate being charged is an important consideration when choosing the right funding for your business needs.
But you also need to think about your cash flow needs and what the monthly repayments will be. Would a fixed rate work best for you? What term of loan do you need? Will you want the flexibility of being able to make repayments of capital without penalty?
All important consideration when choosing the right lender for your business finance.
If you’d like to find out more about how we can help you choose the right lender to match your funding needs, give us a call on 020 8949 2122 or email us at email@example.com