Regardless of the state of the economy, all entrepreneurs, either new in their trade or old hats in business, when looking for funding tend to be bothered to brag about the lowest possible rate they can achieve.
Who can blame them? Cost savings - especially when we are still experiencing a recession as economic symptoms - can be the key to the survival of the company and their personal financial future.
But sometimes it can only be even more harmful to just base a financing decision at only its cost (its interest rate in this case). All business decisions should be taken throughout - with both benefits and costs being considered simultaneously - especially with corporate loans.
Let me explain: In today's market, all offers on a corporate loan - regardless of costs - should not be taken easily, given that these business transactions are hard to come with. Keeping in mind that this interest rate is too high and that a better one will follow tomorrow can only be destructive thinking, because nothing can come tomorrow - especially in the continued sluggish economy and all lenders are too careful.
If the company's ownership decision falls so much on the loan's interest, perhaps a corporate loan is not something that the business really needs at this time, or may be a decision that only spirals the business along an unhealthy path.
This is what most business owners, when seeking outside capital tend to get stuck in - the lower rate means more savings for the business and thus a better decision.
But what if the current lender does not lower interest rates from 12% to 8%? Or, if another, lower loan / lender does not follow? Is it still a good business decision?
Look at the cost of the loan or the interest rate is purely one-sided and potentially affect your company's long-term profitability - the benefits of the loan must also be weighed in.
Let's say that the business can take the $ 100,000 loan and use it to generate another $ 5,000 in new monthly business income. Is it really important that the interest rate at this time is as high as the almost $ 200 difference in the price is really trivial (especially over 60 months) compared to possibly lower the loan at higher interest rates and do not get anything in return (lose at $ 5,000 in new earnings per month).
Or, if the business could only generate $ 1000 in new, extra income from $ 100,000 loan? Then, regardless of which interest rate (8%, 12% 50% or higher), the business should not even consider a loan in this situation.
Why do I get this up? Simply because I've seen business after business either lose on their future potential or deathly their organization over a mere one or two percent increase in a corporate tax rate. We are only conditioned to think that if we do not get the course we feel we deserve - then the deal is bad for us. It can not be anymore from the truth. Knowing that these fitness instincts we tend to have is more like the fact that competitors (the other lenders seeking our business) tell us that we can do better or that we deserve better - but in the end, we understand they're never going to our work is beneficial.
The lesson here is that all business decisions are more complex then we can initially think or lead to faith. We learn very early in life to negotiate the lowest costs - like zero interest car loans or buy now with "the lowest mortgages for decades" - either you should not buy a car or a house (regardless of interest rate) if there was no Great need - a need that brings more benefits than its costs.
The same should be done with corporate loans. Loans are just an asset to a company and should be treated as such. Business loans assets should be used to generate more in revenue than they cost - the more the better. If they are not used (like other business assets) to generate the greatest benefit they can generate, they should be deducted from what use they are currently employed and put into use that will benefit more. It's simply a business act.
In my experience, I've always found it easier to look at the benefits first (like the increased monthly income that can be generated) and look for the lowest options to get those benefits. But, as I said, this is essentially opposite to what we tend to learn in our society or in our markets (remember percentages in percentages - which have lost interest income embedded in the price). But sometimes the best entrepreneurs think outside the box and tend to oppose all conventional wisdom that we may have been subjected to - primarily for the benefit of others and not themselves.