Selecting a Source of Finance

Factors to consider when obtaining Finance

Before obtaining finance, Businesses and individuals should make some important considerations:

• Cost of Borrowing: The interest rates and fees associated with borrowing should be understood. High interest rates can impact profitability.
• Purpose of Finance: The reason for needing finance should be clearly defined. Different purposes, such as expansion, equipment purchase, or working capital, may require different types of finance.
• Repayment Terms: The length and flexibility of repayment terms should be checked. Longer terms may mean lower monthly payments but higher total costs.

Lenders also have considerations to make before making loans:

• Collateral Needed: It should be determined if assets are required as security for the loan. Collateral provides security for the lender but puts the borrower's assets at risk if repayments are not made.
• Creditworthiness: The borrower's creditworthiness should be assessed by the lender. A good credit history increases the likelihood of approval and may result in better borrowing terms.
• Capacity (Ability to Repay the Loan): The borrower's ability to repay the loan should be evaluated by the lender. This involves assessing household budgets or cashflow forecasts to see if the borrower has the ability to repay the loan.