In a recent equipment financing and equipment leasing trade event we polled over 125 business proprietors having a short survey coupled with various discussions with plenty of willing participants. Our primary question was simple should you lent $100,000 for the business, what’s the dollar interest you’d be willing to repay presuming your credit is good. Most responded that $10,000 of great interest is easily the most they may wish to purchase borrowing that quantity. Obviously, it was all hypothetical concerning wasn’t a particular project in your mind but $10,000 was where most owners’ level of comfort arrived.
We’re feeling lots of people selected $10,000 since it was 10% of $100,000 which seemed like an acceptable maximum on their behalf. Only then do we requested how lengthy a phrase are they going to want the borrowed funds for which is where things got interesting obviously some proprietors stated “as lengthy as you possibly can” however for practical purposes most proprietors responded that 1 to five years or something like that among will make sense but there wasn’t any real focus on the word they just felt they did not wish to pay over $10,000 in interest.
Only then do we requested about rate of interest almost everybody checked the five-9% rate box his or her target rate. Discussing rate was certainly probably the most emotional question on the survey chatting about maximum dollar interest or period of term was bland when compared with rate talk where feelings ran high. Later in case we shared the next chart using the participants and a few eyes opened up wide.
Amount lent: $100,000
Interest compensated back: $10,000
Term / Rate of interest
12 months = 17.9%
24 months = 9.3%
three years = 6.3%
four years = 4.7%
five years = 3.8%
The equivalent $10,000 interest was compensated in each situation but as you can tell, adding yet another year towards the term made a significant difference towards the rate. The proprietors which expressed that the one or two year loan did not make that big a positive change for them so far as strategy yet stated they’d never pay over 10% rate were very surprised to determine how large the main difference was almost double.
The bottom line is when you’re borrowing money you need to first concentrate on your company income and do an analysis what dollar benefit will the finance provide to the organization. The 2nd goal is to get the borrowed funds or equipment lease for that shortest term possible which fits using the business income while still supplying an advantage the more you borrow the greater dollars do it yourself. Finally, consider the rate if you are extending the word another year simply to feel happier about the eye then you are not gaining anything except time which can be of worth but according to our survey, did not really make a significant difference. Concentrating on just one aspect won’t help you produce the very best decision for the business.