The time has come to ask for a loan. There are many doubts, concerns. But few certainties because the financial world is still an unsolved mystery for many.
Therefore, this time we are going to focus on a key item to understand if the credit you are taking out is the right one for your SME: the interest rate. How can I know if it is suitable for my business?
It is adequate because it gives me profitability
The investment in products must be measured correctly to understand if the rate is the one that corresponds to your business. Suppose you sell cars with remote control. The investment to get that product was 500 pesos. It sold for 1400 each. You won for each 900 item.
This number is the one that is divided by the total number of remote-controlled cars, the total assets, to understand how much profitability each invested provides. The credit interest rate must always be kept below that number in order for the loan to be sustainable.
It is the right one because I need it now
Well, sometimes loans are not only used to expand and project a company, but only to have liquidity of immediate funds and to cover some expenses that have no place to be postponed, such as employee salaries. In these cases of use of funds, known as overdrafts (a kind of buffer), the rate could be a little higher, but it helps that the lack of liquidity does not overshadow or interrupt the daily operation.
It is adequate because it is the term I need
It is worth borrowing as long as the term is sufficient to acquire a product (or manufacture it), sell it and collect it before returning it. This is so, always. The term of the debt must be longer than the full return of the business. Consider an example: The season lasts 6 months.
Wholesale SME makes shirts and slippers. You have to manufacture, sell, distribute and get paid within 90 days. In this case, the deadlines will be almost as important as the rate because the repayment of the credit must take the duration of the return so as not to have, precisely, financial problems.
During the last years the inflationary variable also played a fundamental role in the market. If you think that your input (cement, for example) is going to increase more than the rates, you should borrow, buy now and accumulate stock to be ready for what is coming.