applying for a loan

Question 1

what information will lenders be interested when applying for a loan?

Answer 1

• amount and purpose
• business details: ownership structure, future, operations
• financial statements: budget, income statement
  -credit rating: if they have repaid other debts
• deposit
  -security:small business owners put up personal assets as collateral

Question 2

increasing the term?

Answer 2

loans over long period of time will have a higher interest rate however the amount of each instalment will likely decrease

long loan = high interest rate but amount of each instalment will decrease

Question 3

what is the rule of 72?

Answer 3

for compound interest, relates to how long the investment will take to double in value

Question 4

what is high debt ratio dangers (bad debt)

Answer 4

if there is no cash flow the business still has to meet its repayments which could cause the business to collapse. A high ratio might prevent business’ from accessing more borrowed funds.

no cash flow = business collapse
high ratio = prevent access to borrowed funds

Question 5

what is high debt ratios benefits (good debt)

Answer 5

borrowing = access to assets, expand earning capability and increase profit
example:
purchase inventory that can quickly sell or buy equipment that improve production process

Question 6

what is return on owners investment (ROI)

Answer 6

measures how effectively a business has used the owners capital to earn a profit.
formula :
(net profit/average owners equity) x 100

Question 7

what is the relationship between ROI and debt ratio?

Answer 7

level of debt will have a direct impact on ROI.
high debt ratio = high risk but also high ROI because business is earning profit, but is using external funds to do so. Owner receives all profits.

Question 8

what is compound interest?

Answer 8

interest received on the principal amount as well as the interest. your interest earns interest
formula:
A = P(1 + r/n)^nt