27 May 5 Foundational Finance Concepts
For businesses, finance is an important area to focus on to avoid foundational mistakes. For instance, while borrowing for the business, attention must be paid to all aspects which range from full financing costs to opportunity costs to baked-in fees. The latter is ignored in most cases. Factor in everything before you begin approaching finance organizations and in this process, below are some foundational finance concepts to note.
Know the Real Rate of interest
In the world of finance, calculating the ideal rate of interest is part of being financially literate. Ideally don’t simply calculate the Annual Percentage Rate (APR) as total fees divided by the amount borrowed. You should go further to calculate the interest based on the amount outstanding at each stage of repayment. The difference can be massive particularly when interest gets compounded.
Beware of Hidden Fees
When borrowing capital, always factor in origination fees which are costs charged just to process the financing application. Generally, most lenders charge origination fees as a percentage amount deducted from the loan amount. This can impact your true interest rate, as it boils down to how quickly you pay off the loan. Also be aware of additional fees accompanying borrowed This can be administrative fees, application fees, contract fees, due diligence fees, and more. Read the fine print to see the true nature of these fees and negotiate the agreement accordingly.
Time is Money
Your time is very valuable so avoid working with financial institutions with long waiting or lead times. Excessive time spent on long financial processes can be rather used to operate and grow the company. So alternatively, seek out stable financial organizations that have fast, short and nimble processes.
Watch out for Intangible Costs
When taking out loans, watch out for intangible costs which are determined by the loan amounts and repayment periods. Interestingly, smaller loan amounts paid back over a shorter time does not necessarily mean you get lower costs compared to larger loans paid back over a longer time. Rather, you should thoroughly assess all costs and associated fees before making a commitment.
Understand all Factors Involved
Financing can be complex and it is important to know the full details of all the factors involved in the transaction, along with the impacts on your statutory, regulatory, and tax obligations. If unsure seek the help of a finance or accounting professional to help avoid costly errors
Noting these 5 areas can help set out a foundation for a thorough and sound financial base.