Personal Credit Lines and Credit Cards

They are convenient, versatile forms of financing. You can borrow and re-borrow up to line limit as needed.

The negatives: you will pay relatively high interest rates-- rates range from 12% to over 18%; minimum monthly payment on many of these arrangements will repay outstanding balance within 42 months; it is easy to dig yourself deep into debt using credit lines and credit card debt; high outstanding balances against your line can negatively impact your personal credit rating.

A Margin Loan

You can use margin loans for purposes other than buying additional securities.

Any margin loan will be secured by your equity shares. Rates are often below prime, applying is relatively easy, and these loans have very flexible repayment terms.

Loans are initially limited to 50% of purchase price of your equity securities. Loan repayments are triggered when value of your stock falls below margin limit.

The negatives: Because borrowings are predicated on volatile stock values, a margin loan can be a risky proposition; if you default in repaying, brokerage firm can sell your securities to satisfy loan; an untimely sell-off can have a devastating effect on your portfolio and negative tax consequences.

The only safe way to consider a margin loan to finance your home-based business is to limit advances to a relative low ratio of your stock portfolio value – say, 25% or less.

Most of these financing methods are under your control and don’t require business plans or company financials to qualify. Although each of these methods has risks and disadvantages, so do most external methods of financing. Before proceeding with one of these financing methods, carefully consider potential benefits, risks and consequences. Whatever you decide, it helps to know options right under your nose.

Unanticipated audit expense

Many banks reserve right to audit borrowers or to send bank personnel in for inspections. An audit may be required to review accounting procedures or to monitor collections, inventory or another aspect of your firm’s operation. Also, some banks require outside audits by CPA firms in connection with extending credit. Any of these scenarios can create significant expense and involve a substantial time commitment for your firm.

Before signing, review your loan agreement carefully to identify any audit or bank inspection requirement. If your bank requires an audit or inspection that you did not anticipate, try to get it eliminated or try to negotiate limits. You may be able to get a less-stringent requirement or to negotiate a less-expensive alternative to audit or inspection required by your bank.

If all else fails, try to get audit or inspection fees capped.

Late charges

Charges for making late payments to your bank are generally in your control. These charges can be onerous and can add significantly to your firm’s borrowing cost. It is not unusual to see banks tack 300 basis points onto a customer’s borrowing rate for delinquent payments.

While it is worthwhile during negotiating stage of loan to ask for a lower late- payment charge, best solution is to try to avoid these charges. If you can, try to get late-payment rate knocked down to 75 to 150 basis points above your borrowing rate.

Expiry of or Failure to Get a Rate-lock

In a stable rate environment, many banks are willing to lock rate on fixed-rate credit transactions. Rate-locks protect borrower from adverse rate movements prior to closing. In most cases, rates can be held up to 60 days. Rate-locks are not uncommon in real estate loans and equipment installment loans.

If your firm is negotiating a fixed-rate loan, try to negotiate a rate-lock. You may pay loan interest that is a tad higher, but a locked rate can eliminate an unpleasant interest rate swing.

Once you have locked rate, try to stay within holding period for closing transaction. Most banks will eagerly and aggressively pass on rate hikes in a rising rate market, if you fail to comply.

Many hidden bank fees and charges can be reduced or eliminated if you plan ahead and are prepared to negotiate. You are in your strongest negotiating position before your bank issues a commitment letter and before you sign credit agreement. Always read commitment letters and loan agreements carefully. Look for hidden fees, hidden charges and unexpected requirements. You can also ask your bank to prepare a separate list highlighting all potential fees and charges.