Security A bank wont lend you money unless it thinks that your business can

Security a bank wont lend you money unless it thinks

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Security A bank won’t lend you money unless it thinks that your business can generate sufficient funds to pay it back. Often, however, the bank takes an added precaution by asking you for security 30 —business or personal assets, called collateral 31 , that you pledge in order to guarantee repayment. You may have to secure the loan with company assets, such as inventory or accounts receivable, or even with personal assets. (Likewise, if you’re an individual getting a car loan, the bank will accept the automobile as security.) In any case, the principle is pretty simple: if you don’t pay 24. Period of time for which a bank loan is issued. 25. Loan issued with a maturity date of less than one year. 26. Loan issued with a maturity date of one to five years. 27. Loan issued with a maturity date of five years or more. 28. Commitment by a bank that allows a company to borrow up to a specified amount of money as the need arises. 29. Schedule by which you’ll reduce the balance of your debt. 30. Collateral pledged to secure repayment of a loan. 31. Specific business or personal assets that a bank accepts as security for a loan. Chapter 13 Managing Financial Resources 13.4 The Role of the Financial Manager 711
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the loan when it’s due, the bank can take possession of the collateral, sell it, and keep the proceeds to cover the loan. If you don’t have to put up collateral, you’re getting an unsecured loan 32 , but because of the inherent risk entailed by new business ventures, banks don’t often make such loans. Interest Interest 33 is the cost of using someone else’s money. The rate of interest charged on a loan varies with several factors—the general level of interest rates, the size of the loan, the quality of the collateral, and the debt-paying ability of the borrower. For smaller, riskier loans, it can be as much as 6 to 8 percentage points above the prime rate—the rate that banks charge their most creditworthy borrowers. It’s currently around 3 percent per year. Making the Financing Decision Now that we’ve surveyed your options, let’s go back to the task of financing your laundry business. You’d like to put up a substantial amount of the money you need, but you can only come up with a measly $1,000 (which you had to borrow on your credit card). You were, however, able to convince your parents to lend you $10,000, which you’ve promised to pay back, with interest, in three years. (They were wavering until you pointed out that Fred DeLuca started SUBWAY as a way of supporting himself through college). So you still need $22,000 ($33,000 minus the $11,000 from you and your parents). You talked with someone at the Small Business Development Center located on campus, but you’re not optimistic about getting them to guarantee a loan. Instead, you put together a sound business plan, including projected financial statements, and set off to your local banker. To your surprise, she agreed to a five-year loan at a reasonable interest rate. Unfortunately, she wanted the entire loan secured.
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