How to Pay Up Your Bank Loan Without Forfeiting Your Home
Even though funds from investors can be handy to start-ups and facilitate their growth, most entrepreneurs still reportedly prefer to use their personal assets such as homes, bank accounts or any other asset as security for business loans rather than opting for investor’s funding.
The primary reason is usually that they want to be in control of their business. However, opting for bank loans without a careful plan may cause them to lose their business and forfeit the assets they used as collateral.
Banks are more concerned about wealth creation for themselves. The assets used as collateral is to guarantee that they will not lose money on the business loans and if for any reason the borrower is unable to pay back, they have something to fall back on.
The True Nature of Bank Loans
Banks do not lose when they give out business loans. The borrowers are the ones who have to be careful so they do not end up losing their assets. In a case where a borrower defaults on making payments on time, the banks can go ahead to seize the assets used as collateral, sell those assets and recover the amount loaned to the borrower. The entrepreneurs, on the other hand, will be on the losing end.
This isn’t to say business loans are a terrible idea. On the contrary, if a borrower keeps to the payment plans, lenders begin to see them as trustworthy, and this can be useful at a later time when they need to take out another loan. Most times, if a borrower fully repays the loan, the bank is more likely to lend to him, maybe even without demanding him to use his personal properties as collateral.
Thus, taking out a business loan is not a terrible idea in itself. Entrepreneurs, however, need to consider a few guidelines when taking a business loan. The essence of the guidelines is to prevent them from making fatal mistakes that can lead to the loss of the business and their possessions.
1. Honest and Thorough Business Financial Assessment
This is the point where you honestly consider the question: What does my business truly need? There are different online tools to assist you in carrying out this honest assessment. Working Capital Needs Calculator, for instance, helps to clarify the actual costs of undertaking an expansion while also highlighting which areas have a potential of increasing revenue and those sectors that will drag the company behind.
Once you have carried out the assessment, that is the exact amount you should apply for. Being clear on the actual financial state of your business helps you borrow within means. It prevents a company from being stuck with payment it cannot afford.
2. Borrow within the business limit
In simple words, avoid over-borrowing. Having carried out a financial assessment, you know the strength of your business and the exact limits. Therefore, avoid the temptation to take the additional $20,000 the bank has placed on the table. The extra cost it adds to the periodic installment payments may appear not too excessive now, but over time, it may become unbearable for your business. Therefore, stick to the initial sum you applied for and turn your eye away from the extra offer.
3. Build a Wall between your business and personal finances
Build a very tall wall between your business finances and your personal finances. There should be no cause to run the same account for your business and personal use. This simple orderliness makes it easier for you to determine the class under which a particular expense falls. The separation will also help you protect personal assets in cases of disputes arising from business loans, and puts the assets off limits for accountants, banks, and even the IRS’ examination.
4. Place Priority on payment of business loan installments
When the month begins, the loan installment should be the first bill you pay. Your business can still survive without some things for a while, but if you fail to make a payment, the results can better be imagined. Thus, always pay the installments before any other thing. On a scale of preference for bills payment, the installment payment should have a permanent top spot until you fully repay the loan.
In conclusion, a business loan is an enforceable contract. It doesn’t matter that the collateral put up is your personal vehicle or home, the contract is binding, and upon default, you may lose everything.
The relationship is always a win for the bank as they will not enter into it in the first place if they know they will lose money. It is up to you to order your activities so that you can benefit from the relationship at the end of the day.
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