“I think we need a loan for stock, what now?”
"We are looking for a stocking loan and want to repay over 3 years?" I get this all the time and there is absolutely nothing wrong with it. As a business owner you might feel repaying that stock loan over a longer period is better because repayments are lower, in reality, for you, it's not.
Let's talk about why not?
These are my 3 key points that you need to consider before you make an application for that loan that is going to grow your business. I like to try to encourage business owners to use finance as a tool to grow their business. Please don’t fear it, it's actually not scary at all. I must mention that the below is just my opinion but stick with me, I have been doing this for a while so I have some good insights!
Know your numbers.
Okay, you have to know your numbers and that is something GDG Business Finance will help you with. As the business owner, do you have an idea of what kind of cash flow you have available to make a loan repayment every month, even a ball park figure? You should before you ask the question. Making a good impression from the outset will give you more confidence in asking for the loan and also demonstrate to a potential lender that you know your business.
Borrow what you can repay.
This sounds simple but the days of “but if I got the loan, bought the stock well then I can make the repayment” are essentially gone with COVID in the world now. Purse strings have been tightened and access to money via lenders has got tough so you should only ever borrower what you can afford to repay even if the plan for the use of funds goes south. If you need to stretch for repayments to 3 year’s on a stock loan, its probably because its not affordable anyway. I mentioned it already, key part of the journey is just knowing your numbers. Now thankfully lenders are not all that bad and they will help you here. They will do their checks on affordability but how you look to them at this stage is so important. What I mean by this is “Okay, they are asking for a €100k loan over 1 year with a turnover of €150k, this is not going to happen” A decent credit person can form an opinion in about the same amount of time it took you to read that last sentence because their job to know the numbers!
How Much is the loan going to cost?.
Last but not least, it comes down to the cost of finance. A stock loan over 1 year is significantly cheaper than one over 3 years. As the cost of capital increases, it decreases your margin on the goods bought with the loan and then sold. Some might disagree here but for me asking what the APR is the wrong question - You should be thinking about “How Much Is this loan going to cost?” - That for me is the important question with a loan being used to purchase stock.
Example: let's take a simple term loan for €50k that will be used to buy stock, the rate (APR) is 6.25%. The interest to pay on that loan would be around:
1 Year Loan: €1708
3 Year Loan: €4936
Neither of the above is actually 6.25% of the loan amount which is what many believe they are actually paying back. For me this is why you need to focused on “How much Is this loan going to cost”? . In the example above, the difference between a 1 year & 3 year period is €3253. That difference is eating into your margin. Ask yourself - Where would you prefer that money to be, in your bank or the lenders? (p.s we love our lenders as much as our clients, sometimes).
Achieve the above and you will have used finance as a tool to grow the business by increasing revenue, there is no stopping you now!
Would you like to find out more about the do and don’ts of getting a stock loan for your business, just call us, we are nice people. We like to believe we are good at this so we’re here to make your life that little bit easier in a time when we all need some help.
Thank you,
Gary.
