Usually, a lending institution approves a specific percentage of the real estate purchase value depending upon the relevant property development plans. If there are no plans yet, the lender might offer another product to purchase the property and to continue with building the project. The risk is very high in property development financing during the construction, as it can be very difficult to sell the secured collateral when it is only half-way done. That is why the interest rates charged on this type of business loan are usually much higher.

Property Development Financing Costs

The costs associated with property development loans can vary greatly from lender to lender. As the risk assessment is done by the lending institution, they are in charge when it comes to determining the interest rate based on perceived risk factors. To evaluate the risk, the lending party considers the location of the building, the borrower’s financial history and experience in similar projects, the loan size, and repayment terms. The lender would then fix an interest rate on the property development loan which can range anywhere from 5% to 16.2% per annum.

Apart from the interest rates, the lending institution can also charge a fee for the arrangement of the property development loan which is around 1% to 2% of the total capital. The lender can also charge a fee for redemption, which is again 1% to 2% of the principal amount. There is also the broker fee to think about too. If the borrower is using a broker to secure the loan then the broker fee can be around 1% to 1.5% of the capital amount.

Property Development Loan Amount

The amount of funding the borrower can get usually depends upon the value of the collateral, the risk factors, as well as the gross development value. The lending institution releases the funds at regular intervals and in stages in order to manage the loan as well as help to protect itself from any losses. The stage payment can be released either every month or at specific benchmarks set by the builder. Generally, most lenders release around 60% to 70% of the property value as it is on day one during the first stage. However, some lending institutions will release the full amount for the property’s purchase value depending on other factors.

Another key thing to note in property development loans is that the borrower needs to communicate regularly with the lender and arrange for site visits as necessary to ensure the smooth release of stage payments. The lender could also appoint a monitoring surveyor to ensure proper release of stage payments as well as to check that the project is right on track as proposed in the plan. The monitoring surveyor can also check the quality of the works done as well as analyze the value of the property at regular intervals.

Risk Assessment and Repayment

Every lending party has its own strategy when it comes to assessing risk before approving a property development loan. Normally, the lenders will require the borrower to provide personal details such as name, date of birth, and address of communication. They would also need details of the company, details of the planning permissions, revisions, and future applications, as well as the expected timeline to complete the project. In some cases, the borrower is also required to submit the detailed costing which the lender can then evaluate and use as a point of reference to release the funds as applicable.

The repayment of the loan amount can be done monthly, quarterly, annually or in full at the end of the project as agreed by both the lender and the borrower. The monthly interest is added to the loan amount so the borrower is not required to pay anything every month. This is because development projects usually have a very poor cash flow during the construction period, and most of the income comes after the completion of the project.

A commonly cited drawback of property development financing is that lenders require too much information to assess the risk in order to approve a loan. Although this can be facilitated by a well-planned project proposal, some of the information might have to be provided individually. Regardless, this type of business financing can be a boon to property developers and can create opportunities for better profits by allowing them to take on bigger projects. Property development financing also allows a builder to work on multiple projects at the same time by helping to ease their financial burdens.

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Review Both Old and New Costs

When times are good, and cash is flowing in, it is easy to neglect to look over your books to see where you can save a few dollars. Then when times get rough, we scramble to cut costs and save a few pennies.

Reviewing your current costs and any new costs quarterly, and seeing where the money is going, and how it plays a part in your business, will allow you to adjust your costs as you go. Are you spending money on something that is not improving your business? Does your business really need that? Is there a supplier who offers it at a lower cost? Knowing the answers to these questions is extremely helpful, and going over them regularly will give you the change to adjust them as needed.

Make a Plan

A successful business always needs a good business plan. You create the plan, and then bring it to life. Having a plan for a recession is a very wise thing to do. That way you can set yourself up for success. You will have a game plan ready to go and put into action on any given day. You will not have to waste your time creating a plan at the point a recession hits, as your time and energy will be greatly needed to keep everything running smoothly.

Create your Culture

If the leader of your team of employees is struggling because of stress or anything else, the team of employees will be affected too. If the leader creates a great culture at work, and does not let anything interfere with that culture, people will be happier and feel safer while at work, even during hard times.

A recession will affect every aspect of people’s lives. Creating a great culture will make people want to come to work. People want to do a better job, and they want to please their leader. It is a proven fact that employees are more productive when they are happier at a job, so remove any obstacles you can that could prevent that.

Team building events throughout the year are a wonderful way to cultivate great culture. Your team will know you are going above and beyond for them, therefore you will see them working harder.

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A decline in general economics is referred to as an economic recession. It is usually attached to drops in the stock market, a decline in real estate loans, and an increase in unemployment rates. Many things can factor into an economic recession, such as high interest rates, inflammation, reduced wages, and reduced consumer confidence. These factors can be detrimental to a business if they are not prepared.

Foreseeing any issues such as a recession and planning for that will allow your business to succeed during the times of crisis. Failure to do so would mean that if another recession hits, you would be scrambling, like many others, trying to figure it out enough to stay afloat. Below are some steps you can take to prepare your business for recession.

Cash Reserve

When a recession hits, companies generally pay their invoices and debts slower than normal. They also are diligent about asking for payment from customers and clients earlier and sooner than normal. Both of these things will start to affect your available cash.

If you have a cash reserve in place because you have prepared for the unknown, these payments will not seem as daunting. You will know what you have available and what you need to continue making in order to be successful in this rough time.

When building your cash reserve, set a goal of how many months you want your reserve to cover. Experts recommend 3 months as a minimum, although it can be beneficial to go with 6 months as well.

Invoicing and Payment

Remember that when a recession hits, it affects almost everyone. Clients and customers will also be affected and you may notice that they will delay in paying their bills to you. This will definitely affect the cash flow of your business. By managing your invoices effectively, you can prevent the stress that comes with seeing your cash flow fade away in front of your own eyes.

Checking a customer’s credit is a wise way to see where they sit with paying off other bills. If you are working with a client who has great credit, and they are known for paying their bills on time, you are less likely to find yourself trying to track them down asking for your payments.

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Depending on the current financial situation of your business and your future needs, one may be better for your business than the other. A term loan for a business is best used as an investment. If your company needs to purchase fixed assets, additional equipment, or purchasing a business, a term loan will give you a lump sum payment that you can use for whatever your business needs. Then you will have monthly payments to settle it off until it is completely paid off.

Note that you will not be able to take more money out with the same loan though; it is a fixed amount. If your business needs more money after this loan is paid off, you can apply for another term loan. When applying for the loan, be prepared to show the bank what you need the money for. Have a plan that you can show them that explains how the money will be spent, and how this will make your company more money. When they see this, they will be more likely to lend you the money, as they have seen your business plan and have faith that you will not have any issues paying it back.

A business line of credit is beneficial to a business that needs the funds as operating funds. This means the money will be used for business expenses. It may be used for paying bills, purchasing equipment that may be needed down the road, and to cover any surprise costs when you do not have the additional cash flow to cover.

A line of credit is a great option for those who are looking for something short term. If you know you will be able to pay it off in less time than a term loan, or if you think you might not even use most of it, then a line of credit may be the way to go for you. Since you are only charged interest on the amount that you use, and you can view your balance at any time, some choose this option over a term loan because it can be dealt with or paid off simply when you have the money to make the payments.

When deciding what is best for your business, it is better to review your business and see where you are sitting currently. Then look at the goals you have set for your business and what you need to achieve that goal. Once you have this information, you can have a rough idea of how much you are going to be asking for your line of credit or term loan, and how soon can you pay it off. Once you know the answer to this question, you will be ready to decide what is best for your business.

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Differences between Line of Credit and Term Loan

A business line of credit is very much like a personal line of credit or home equity credit line. It is also similar to a credit card. This means that you will have access to finances, if you need them. The line of credit will allow you to have access to the amount your business is approved for, and you will not be making any payments on it, or paying any interest on it, unless you actually used that money.

Lower interest rates are a common benefit of having a business line of credit. The closing costs are also lower than if you choose to take out a term loan. Now, a big difference between a business line of credit and a term loan is that if you start missing payments, or your payments start tricking in late, your bank may start charging you a high interest rate on a line of credit. On a term loan, your rates will stay the same throughout the length of the term.

A business line of credit can be renewed every year or so. This way, you can go over your credit line with your bank during this time, and adjust or plan as needed. For a business term loan, you would need to talk to your bank and they would then give you the money in one lump sum. Before approaching the bank, you should know how you plan to pay it back within the period (term) you have agreed upon.

Term loans can be very attractive to some as you can choose the term and interest rate (fixed or variable) at the time you take the loan. Yet repayments on the term loan will begin immediately after the loan is taken out, even if you have not touched the money yet. The interest rates and the closing costs are known to be higher for a term loan than with a business line of credit.

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Amortization

This method uses spreading the cost of an intangible asset over its use and life span. Note that the term “amortization” could also be used to express loan payments that include both the principal and the interest amount. Therefore, understanding the context is very necessary to understand how it works in accounting.

In accounting, amortization calculates the asset’s value in a straight-line technique, by keeping the amount same throughout the useful life of the asset. Usually, amortization is used to evaluate those assets that normally cannot be resold or salvaged. The most common non-physical assets that are evaluated through amortization include trademarks and patents, cost of issuing bonds, organizational costs, as well as proprietary assets like copyrights and franchise agreements.

Depreciation

This method is used to evaluate tangible assets such as the company building, financed equipment and machinery, office furniture, vehicles, etc. As such physical assets can be resold or salvaged after they have served their purpose for the company, depreciation calculates the value of these assets by subtracting their expected resale or salvage value from its original worth. This difference is spread out evenly across the expected useful life of the fixed asset.

Note that depreciation of some tangible assets can be done on an accelerated basis; company vehicles are usually depreciated this way. This refers to expensing a greater portion of the depreciation value of the asset in its preliminary useful years.

What is Depletion?

Just like amortization and depreciation, the depletion method can also be used to evaluate the value of a business’ assets. However, this approach is mostly used to determine the cost of natural resources in mining, petroleum, timber, and other similar companies.

For instance, for a petroleum company, the depletion method would be used to calculate the value of oil for the company’s operations. To do that, it takes the life of the oil resource (well) into consideration and spreads the costs of its yield across the life and usability of the resource. This can then help the petroleum company in easier tax reporting.

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Financial forecasting can help businesses to calculate the potential revenue or loss and manage the funds logically in view of that. It can simplify the decision-making process, by assessing the marketing efforts of the recent past and figuring out whether they were worth the cost. Forecasting also helps to understand cash flow in a simpler way, and estimate the sales and probable profits.

Basic Models of Financial Forecasting

There are a lot of different approaches to forecasting business growth, but all of them use any of the following three models.

• Extrapolation – This method analyzes historical revenue data in order to calculate the prospects of the business. It uses a time-series method of quantitative forecasting where the data is collected over a defined period to identify future trends.
• Regression/Econometrics – This method employs a statistical procedure to forecast business growth. The main technique here is to evaluate the relationship between the dependent and independent variables that usually lead to revenue generation.
• Hybrid Forecasting – This method takes practical aspects into account to predict the growth of the business. Instead of using data and statistics for estimating potential sales and revenue, this technique uses knowledge-based forecasting to provide more accurate results.

Before choosing any of the said models for financial forecasting, you need to carefully review the company balance sheet to understand what assets and liabilities you have as of date. Moreover, have an idea of the last year’s expenses as well as the expected costs for the upcoming projects and promotions. Once you have those details ready, get in touch with a financial advisor to select the right forecasting approach for your business.

Remember that the varying state of the economy and the rising competition in the industry can be big factors that can affect the metrics of your forecasting. Then there is the ever-changing technology and seasonal cycles as well; how well you adapt to such things can have a great impact on the financial forecasting for your business as well. Still, with proper financial forecasting, you can always be prepared for any unexpected decline in the business turnover.

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It is to be noted that the loan amount will be lower or equivalent to the total cost of the equipment in the market. Hence, you can be relieved that you will not have to pay an amount that is much higher than the current market value of the equipment. Plus, the equipment piece will be fresh or brand new, unlike a leased product. Therefore, maintenance and repairs will be much lower.

Moreover, you will have to repay the loan amount with interest within the lifespan of the product. Once you are done with the repayment following every term and condition, you will get its ownership.

The Pros

• Easy to qualify.
• Relatively low cost.
• Does not require collateral.

Cons

• Require down payment in some cases.
• You will have to purchase the equipment.

Equipment Lease

When it comes to equipment lease, you cannot own an equipment piece by leasing it. Here, the owner of the equipment rents it out to others on a contract basis. Hence, you will not get complete ownership of the product outright in this case. However, at the end of your lease period, you can decide whether to terminate the lease, renew it, or purchase the equipment. There are mainly two types of leases; operating lease and capital lease.

Operating lease: This is one of the best leasing options available, since the monthly payments will be comparatively low in this case. Besides, the business owner will get a chance to own the rented piece of equipment at the end of the lease period. For this, all you have to do is to pay the current market value of the equipment. Unsurprisingly, this type of lease is also known as fair market value lease.

Capital lease: Unlike operating leases, capital leases impose higher monthly payments and are crafted more like business loans. Nevertheless, the business owner will get an option to buy the equipment piece at the end of the lease period either by paying 10% of its purchase value or a nominal value like $1. As a result of the structure of capital lease, it is sometimes indistinguishable from equipment finance.

The Pros

• No need of collateral or down payment.
• The application process is quite easy.
• Flexible terms and condition.
• Repairs will be on the lender.

Cons

• Lease amount can go higher than the product price.
• Lease amount will depend on your income, age, annual revenue, etc.
• The lease amount will be decided by the lending company.

In simple words, equipment finadncing will be like buying a house on EMI basis and equipment leasing will be like renting an apartment.

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In this case, your business enterprise can buy a piece of equipment from a lending company on a loan basis. Here, the equipment will act as your collateral. That is, you will get the complete ownership over the equipment once you repay the full loan amount to the lender on time. In other words, your equipment will buy for itself or you may repay the loan amount by making a profit using the equipment.

On the other hand, equipment leasing is a contractual plan. Here, you can rent an equipment piece from its owner for a certain period. The lease amount shall be paid at regular intervals until the expiration of the contract. However, you will not get ownership of the business equipment during the leasing period.

Even though both these options will be ideal for every business scale, these will be especially useful for startups and low-budget firms. Furthermore, you can consider these options when you plan to expand your establishment on a budget. The type of equipment piece that you can finance or lease includes machinery, furniture pieces, computers, printers, company cars, kitchen appliances, HVAC units, etc. This, however, depends on the type and overall turnover of your business.

Usually, it will be really challenging or impossible for a small startup to finance all above-mentioned factors altogether using their own capital. This is when most people think about equipment finance and equipment lease since both options let you acquire your business equipment instantly. Still, both these options are structured in different ways. While the former is similar to business loans, the latter is more like a rental agreement. It is quite natural for you to get confused when it comes to choosing the right option. In order to help you out of this dilemma, a quick comparison between equipment finance and lease is given below.

Equipment Finance

As mentioned earlier, you will get the opportunity to own an equipment piece right away even if you do not have a budget to afford it by means of equipment financing. Here, a lending company will back you with the cash to purchase your desired business equipment piece and you can repay it on a periodical basis. The total value of your loan, as well as the repayment period, will depend on the type of equipment you are purchasing.

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Traditional Term Loans

Traditional term loans are sometimes referred to as medium-term loans. These are among the commonly used secured business loans. These loans are comparatively straightforward. The business borrows a sum of money, which should be paid back along with interest. This should be completed within a duration allowed to them. Although it is possible to get a medium-term loan from online lenders, banks are the usually frequented place for traditional loans.

Banks usually request you to offer security in the form of collateral. You should be ready to offer vehicles, savings, equipment, or real estate holdings for this type of secured business loans.

SBA Loans

Among secured business loans, SBA loans are a good financing choice for small business owners. There are three different programs offered by the SBA which are the Microloan Program, the CDC/504 Loan Program, and the 7(a) Loan Program. These loans are not directly offered by SBA. Instead, these are business loans which have been guaranteed by the SBA.

SBA stands in as the guarantor of the loans. They guarantee a proportion of the loan in order to motivate the lenders to finance small businesses by offering incentives. It is beneficial for both lenders and business owners. Lenders risk less and businesses can avail larger loans which they would not have qualified for otherwise.

Business Lines of Credit

Business line of credit is another option under the secured business loans. This works similar to a credit card. Businesses are given a pool of funds which they can draw from upon need. Later they only have to pay back what they used. After the business repay the amount, their account gets refilled to the initial amount by the lender. There are options to use secured and unsecured lines of credit.

Above discussed are some of the different types of secured business loans. Each has its own benefits and downsides. Make sure you understand them properly before you choose one of these to help your businesses.

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