Before you decide to apply for a small business loan, there are several factors to consider. These factors include the interest rate, age of the borrower, and documentation. Tax implications may also come into play. By understanding these factors, you can find the right business loan for your needs. If you are unsure of whether you qualify for a small business loan, consider contacting a financial institution that provides small business loans.
Interest rates
Interest rates on lending money are charges that lenders make on the principal, or money borrowed. Borrowers pay interest to the lender in exchange for using the asset for a defined period. Interest rates on loans vary widely, and are often referred to as the “cost of money.” Increasing interest rates increase the cost of borrowing money. Almost all lending transactions involve interest, from individual loans for a home purchase to businesses taking out loans to expand their operations. Borrowed money is typically repaid in one lump sum by the repayment date, or it may be paid in periodic installments.
Interest rates on lending money are typically expressed as an annual percentage rate (APR), which is a number that lenders quote on consumer loans. These rates apply only to the interest that you borrow and do not factor in compounded interest. CDs and savings accounts, on the other hand, are quoted in terms of an annual percentage yield, which takes compounding into account.
Documentation
Documentation when Lending Money is a vital step in making a transaction as safe as possible. Whether you are lending money to a close family member or a business partner, you should always make sure that everything is in writing. This will prevent any miscommunication and protect both parties from nonpayment. Documentation will also help you collect the money in case the borrower fails to make payments.
The documentation must include all the terms and conditions of the loan. Make sure to have a third-party witness sign the document as well. Be sure to spell out all the terms of the loan, including when repayment is due and how the lender can call off the loan.
Age of borrower
While age should not be a determining factor in loan approval, it can hurt the loan decision. Although the National Consumer Credit Protection Act prohibits discrimination based on age, it’s still important for lenders to make sure that borrowers can afford to make their loan repayments. Most lenders will look at the borrower’s age as one factor in the decision, but the age of the borrower should not be the sole deciding factor.
Tax implications
Lending money to family and friends can be tax-wise if you plan your loan transactions properly. It is important to document the loan agreement, state the total amount, interest rate, and purpose of the loan, and include a repayment schedule for principal and interest. Also, note any special tax treatment for the loan.
Unlike a business loan, which is taxable, lending money to a friend or family member is tax-deductible, and the loan must be documented as a loan. However, you must remember that lending money to family members or friends is not tax-deductible if the money is a gift. Unlike traditional financial lenders, family and friend lenders tend to be more lenient with repayment arrangements and interest rates are generally lower.
