Why the loan purpose, or why you want the loan, matters to a lender

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Transcript

Welcome back. In today's lesson, I'd like to talk to you about the loan purpose. And with a lender. This means everything to them, the loan that you're asking for not only needs to make sense to you, so meaning that the money is going to help your business grow. But it also needs to make sense to them. At a high level, they start with things like is the loan going in?

Are the loan proceeds going to be used for something that is moral, ethical, legal? Is it breaking any laws? Is it something that just isn't right? Is it in an industry that's taboo to them? The other thing that a lender thinks about immediately is, is are these loan proceeds going to help your business make more money. A good example of a bad loan purpose would be let's say you need the money to get caught up on taxes that raises a red flag for the lender.

And it may be a really bad loan purpose, probably for you as well. Something you might need to work on. An example of a good loan purposes. Let's say you're going to buy the building that you're in, maybe you're renting right now and you're paying $5,000 a month in rent and you can buy the business With the going rates and the amortization that they used, maybe you could get into it for $4,000. Not only would you save money on that, but they would also have collateral that they can use for the loan, the building itself. So the purpose behind that it's really, really strong.

Another thing about loan purpose that you need to know is not only does it have to make sense, but loan purpose will really define the loan structure itself. This is a phrase I want you to learn. So you may need to go over this lesson a couple of times, but understand that fixed equals fixed and variable equals variable. What I mean by that, well, if you have a fixed purpose, you're going to most likely have a fixed loan structure. If you have a variable purpose, you're going to have a variable loan structure variable, meaning I'm not exactly sure exactly how much money I need. It could change month to month, or I don't know down to the penny, exactly what something's going to cost me.

Let's look at a couple of examples. We'll start with fixed loan structures. A great example of that is a piece of equipment you're going to buy, you'll likely notice Exactly what that piece of equipment is going to cost you to buy. Let's say you're buying a new printer for your business, and it's going to be $10,000. That's a fixed amount. So we're looking at a fixed loan structure, maybe alone that's going to last five years, Real Estate's another great example that building that we talked about, most likely, you're going to know exactly what that building is going to cost you to buy.

So the lender will use a fixed loan structure for that that loan will be done for the exact amount that you borrow over a given specific period of time. Know that that period of time will be longer depending on how big the purchases so if you're buying that piece of equipment, notice that I used to as an example, five years versus real estate amortization, or how long that loan will be on the books could be five to 30 years depending on how big the loan is. So variable loan structure again, variable meaning we don't know exactly how much we're going to need on a given day. A great example of that is for replacing inventory. If you have inventory that you sell, you don't always know exactly how much you're going to sell in a given month. Or therefore how much you're going to have to reorder.

So a lot of times a lender will use a variable loan structure in the form of a line of credit. It's out there for 12 months, you borrow two, you're approved for $10,000, you borrow 3000. This month, you pay most of it back or all of it back. And then you borrow again the next month if you need more or less inventory that you have to buy. Remember, we talked about and common terms and acronyms AR are accounts receivable, that's typically a variable loan structure as well, you don't always know how much your clients are going to pay you Unfortunately, some of them can run behind. So if you need to finance the difference there between the money you spent to buy the materials to make that product and what they owe you.

That's typically a variable loan structure as well. Another great example, this is maybe a line of credit for payroll. Now, if you're constantly running behind on payroll, that's a bad loan purpose. But let's say that payroll can fluctuate a little bit for you. Maybe you have commissions and things like that. You could consider putting a line of credit in place and that's going to be a variable amount.

You never know to the penny exactly how much you're going to need. That can be in a variable loan structure.

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