Avoid Poor Decisions and Repeat Good Ones on Business and Finance

Finally, you have to decide whether you can afford the financing. Is the right time to take on more debt? If capital costs 14 percent (interest rate), and the compay earns 5 percent on sales after taxes, how great an increase in sales is required to service a term loan of $10,000? Can the company achieve or exceed that increase? A term loan of $10,000 at 14 percent annual interest amortized ober five years costs $232 per month, or $2,784 per year to service. Annual sales would have to increase $55,680 to cover this amount. Is the addition of the equipment purchased y the loan practical? Or is it not going to have that impact on sales?

A side point: The new equipment may increase productibity and profitability, may be necessary so that the business remains competitive, or may represent and expansion of the market for the company (and so on). No financial decision should be made in isolation of such factors – nor should a borrowing decision be made without at least considering the impact of the loan on sales and profits.

What is the timing? Another way to pare down loan costs is to pay close attention to the timing of the disbursement of the loan proceeds. If a loan can be postponed, it may result in lowered costs.

How will it make your business more profitable? Why does the loan make good business sense? The supporting (and counter) arguments should be jotted down to make sure that good decisions are made more often than not. It's easy to forget why a decision was made months after it was made. The planning process helps you to avoid repeating poor decisions – and makes it easier to repeat good ones.