How to Use the Rule of 72

How to Use the Rule of 72.

The Rule of 72 is a handy tool used in finance to estimate the number of years it would take to double a sum of money through interest payments, given a particular interest rate. The rule can also estimate the annual interest rate required to double a sum of money in a specified number of years. The rule states that the interest rate multiplied by the time period required to double an amount of money is approximately equal to 72.
The Rule of 72 is applicable in cases of exponential growth, (as in compound interest) or in exponential "decay," as in the loss of purchasing power caused by monetary inflation.

Method 1 Estimating "Doubling" Time.
1. Let R x T = 72. R is the rate of growth (the annual interest rate), and T is the time (in years) it takes for the amount of money to double.
2. Insert a value for R. For example, how long does it take to turn $100 into $200 at a yearly interest rate of 5%? Letting R = 5, we get 5 x T = 72.
3. Solve for the unknown variable. In this example, divide both sides of the above equation by R (that is, 5) to get T = 72 ÷ 5 = 14.4. So it takes 14.4 years for $100 to double at an interest rate of 5% per annum. (The initial amount of money doesn't matter. It will take the same amount of time to double no matter what the beginning amount is.)
4. Study these additional examples:
How long does it take to double an amount of money at a rate of 10% per annum? 10 x T = 72. Divide both sides of the equation by 10, so that T = 7.2 years.
How long does it take to turn $100 into $1600 at a rate of 7.2% per annum? Recognize that 100 must double four times to reach 1600 ($100 → $200, $200 → $400, $400 → $800, $800 → $1600). For each doubling, 7.2 x T = 72, so T = 10. So, as each doubling takes ten years, the total time required (to change $100 into $1,600) is 40 years.

Method 2 Estimating the Growth Rate.
1. Let R x T = 72. R is the rate of growth (the interest rate), and T is the time (in years) it takes to double any amount of money.
2. Enter the value of T. For example, let's say you want to double your money in ten years. What interest rate would you need in order to do that? Enter 10 for T in the equation. R x 10 = 72.
3. Solve for R. Divide both sides by 10 to get R = 72 ÷ 10 = 7.2. So you will need an annual interest rate of 7.2% in order to double your money in ten years.

Method 3 Estimating Exponential "Decay" (Loss).
1. Estimate the time it would take to lose half of your money (or its purchasing power in the wake of inflation). Let T = 72 ÷ R. This is the same equation as above, just slightly rearranged. Now enter a value for R. An example.
How long will it take for $100 to assume the purchasing power of $50, given an inflation rate of 5% per year?
Let 5 x T = 72, so that T = 72 ÷ 5 = 14.4. That's how many years it would take for money to lose half its buying power in a period of 5% inflation. (If the inflation rate were to change from year to year, you would have to use the average inflation rate that existed over the full time period.)
2. Estimate the rate of decay (R) over a given time span: R = 72 ÷ T. Enter a value for T, and solve for R. For example.
If the buying power of $100 becomes $50 in ten years, what is the inflation rate during that time?
R x 10 = 72, where T = 10. Then R = 72 ÷ 10 = 7.2%.
3. Ignore any unusual data. If you can detect a general trend, don't worry about temporary numbers that are wildly out of range. Drop them from consideration.

Method 4 Derivation.
1. Understand how the derivation works for periodic compounding.
For periodic compounding, FV = PV (1 + r)^T, where FV = future value, PV = present value, r = growth rate, T = time.
If money has doubled, FV = 2*PV, so 2PV = PV (1 + r)^T, or 2 = (1 + r)^T, assuming the present value is not zero.
Solve for T by taking the natural logs on both sides, and rearranging, to get T = ln(2) / ln(1 + r).
The Taylor series for ln(1 + r) around 0 is r - r2/2 + r3/3 - ... For low values of r, the contributions from the higher power terms are small, and the expression approximates r, so that t = ln(2) / r.
Note that ln(2) ~ 0.693, so that T ~ 0.693 / r (or T = 69.3 / R, expressing the interest rate as a percentage R from 0-100%), which is the rule of 69.3. Other numbers such as 69, 70, and 72 are used for easier calculations.
2. Understand how the derivation works for continuous compounding. For periodic compounding with multiple compounding per year, the future value is given by FV = PV (1 + r/n)^nT, where FV = future value, PV = present value, r = growth rate, T = time, and n = number of compounding periods per year. For continuous compounding, n approaches infinity. Using the definition of e = lim (1 + 1/n)^n as n approaches infinity, the expression becomes FV = PV e^(rT).
If money has doubled, FV = 2*PV, so 2PV = PV e^(rT), or 2 = e^(rT), assuming the present value is not zero.
Solve for T by taking natural logs on both sides, and rearranging, to get T = ln(2)/r = 69.3/R (where R = 100r to express the growth rate as a percentage). This is the rule of 69.3.
For continuous compounding, 69.3 (or approximately 69) gives more accurate results, since ln(2) is approximately 69.3%, and R * T = ln(2), where R = growth (or decay) rate, T = the doubling (or halving) time, and ln(2) is the natural log of 2. 70 may also be used as an approximation for continuous or daily (which is close to continuous) compounding, for ease of calculation. These variations are known as rule of 69.3, rule of 69, or rule of 70.
A similar accuracy adjustment for the rule of 69.3 is used for high rates with daily compounding: T = (69.3 + R/3) / R.
The Eckart-McHale second order rule, or E-M rule, gives a multiplicative correction to the Rule of 69.3 or 70 (but not 72), for better accuracy for higher interest rate ranges. To compute the E-M approximation, multiply the Rule of 69.3 (or 70) result by 200/(200-R), i.e., T = (69.3/R) * (200/(200-R)). For example, if the interest rate is 18%, the Rule of 69.3 says t = 3.85 years. The E-M Rule multiplies this by 200/(200-18), giving a doubling time of 4.23 years, which better approximates the actual doubling time 4.19 years at this rate.
The third-order Padé approximant gives even better approximation, using the correction factor (600 + 4R) / (600 + R), i.e., T = (69.3/R) * ((600 + 4R) / (600 + R)). If the interest rate is 18%, the third-order Padé approximant gives T = 4.19 years.
To estimate doubling time for higher rates, adjust 72 by adding 1 for every 3 percentages greater than 8%. That is, T = [72 + (R - 8%)/3] / R. For example, if the interest rate is 32%, the time it takes to double a given amount of money is T = [72 + (32 - 8)/3] / 32 = 2.5 years. Note that 80 is used here instead of 72, which would have given 2.25 years for the doubling time.


FAQ.
Question : When would I need to use the rule of 72?
Answer : It's a handy shortcut when considering compounded, monetary gains or losses. For example, you might want to know how long it would take for invested money to double in value, given a specific rate of interest.
Question : How do I calculate compound interest?
Answer : The formula for annual compound interest (A) is: P [1 + (r / n)]^(nt), where P=principal amount, r = the annual interest rate as a decimal, n = the number of times the interest is compounded per year, and t = the number of years of the loan or investment.
Question : What is APY for an APR of 3.5% compounded?
Answer : It depends on how often the interest compounds: annually, semi-annually, quarterly, monthly or daily.

Tips.

Let the Rule of 72 work for you by starting to save now. At a growth rate of 8% a year (the approximate rate of return in the stock market), you would double your money in nine years (72 ÷ 8 = 9), quadruple your money in 18 years, and have 16 times your money in 36 years.
The value of 72 was chosen as a convenient numerator in the above equation. 72 is easily divisible by several small numbers: 1,2,3,4,6,8,9, and 12. It provides a good approximation for annual compounding at typical rates (from 6% to 10%). The approximations are less exact at higher interest rates.
You can use Felix's Corollary to the Rule of 72 to calculate the "future value" of an annuity (that is, what the annuity's face value will be at a specified future time). You can read about the corollary on various financial and investing websites.

Warnings.
Let the rule of 72 convince you not to take on high-interest debt (as is typical with credit cards). At an average interest rate of 18%, semiretired credit card debt doubles in just four years (72 ÷ 18 = 4), quadruples in eight years, and becomes completely unmanageable after that.

April 10, 2020

How to Choose Business Financing

How to Choose Business Financing.

Every business needs funding for a variety of reasons, including startup, operations, equipment and project completion. Finance for business is a complex subject that must be approached from a variety of angles. There are many business financing options, some of which may or may not be right for your particular needs. In order to evaluate your situation and determine which finance avenues to pursue, there is a variety of factors to consider. Follow these guidelines to choose business financing.



Method 1 Arranging for a Loan.

1. Compare loans with other types of financing. Loans are a type of debt financing. This means that you have to pay the money back, plus interest. Loans are typically offered by banks, credit unions or other financial institutions. Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.

Equity capital is the current market value of everything the company owns less any liabilities owed by the company.

Lenders are sometimes hesitant to give loans to companies without a lot of equity capital. Without equity capital, businesses don't have much collateral to put up for a loan. Also, revenues earned by the business will go toward repaying the debt instead of growing the business.

2. Get a line of credit from a bank. A line of credit is different from a typical loan in that it doesn't give you a lump sum of cash. Rather, like a credit card, you withdraw from the available credit any time you need it. You only withdraw as much as you need. This gives you control over the amount of interest expense you will have to pay. A line of credit can help you control your cash flow as your expenses or income ebb and flow.

To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.

Annual reviews are required to maintain your line of credit.

3. Obtain a business loan from a bank. A business loan is like any other kind of term loan. Business loans come with fixed interest rates. You make monthly payments over a period of years until the loan is paid off. Unlike a line of credit, a term loan gives you a lump sum of cash up front. Businesses who are expanding their space or funding other large investments can benefit from a term business loan.

Before making a loan, lenders want to know what the loan is for and how you will spend the money. Be prepared to demonstrate that the loan is for a sound financial purpose.

Different lenders require different documents. In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.

Large banks tend to avoid working with small businesses. They don't want to do all of the work to underwrite a small loan that won't make a large profit for them.

Local banks with whom you already have done business or credit unions may be more willing to work with small businesses.

4. Apply for a commercial loan. A commercial loan is similar to a home equity loan. It is for businesses that own commercial real estate. You borrow against the equity you have in the commercial real estate you own. The amount you can borrow depends on the value of your property and how much equity you have.

Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky. Therefore, they tend to charge higher interest rates for them. Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan.

5. Request a Small Business Association (SBA) loan. These loans are given by participating banks and are guaranteed by the SBA. They are for businesses that might have trouble getting a traditional bank loan. The SBA guarantees a portion of your loan to repay if you default on your payments. Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100. Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.

SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.

SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.

Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.

Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.

Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S. Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA).

6. Work with state and local economic development agencies. Economic development agencies exist in every state and in some local municipalities. They provide low-interest loans to businesses that might not qualify for traditional bank loans. In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance. You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies. You can also contact your city or county government office to find out about their economic development programs.

Each agency has its own application process. However many require the same basic documentation. Gather the following information.

A loan application form that details why you are applying for the loan and how you will use the money.

Your resume gives lenders information about your expertise in the field.

All lenders will require a sound business plan. For help with writing your business plan, visit www.sba.gov/writing-business-plan.

Your business credit report gives lenders information about your credit worthiness.

Be prepared to submit your business and personal tax returns for the past three years.

Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements. You may also be asked to submit projected financial statements.

Be able to demonstrate your business' current financial position with accounts receivable and accounts payable information.

You may need to put up collateral, especially if you cannot provide strong financial statements.

Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases.

7. Consider online lending. Online lending services include Kabbage and OnDeck. These loans are for businesses who want small, short-term loans. Businesses turn to these lenders to handle short-term cash flow shortfalls. The application process is quick, and most applicants can complete the application in an hour. If approved, you get the money within days.

Be aware that you will pay for the convenience of the fast processing time. These loans are expensive. A typical loan from an online source costs about the same as taking a cash advance from your credit card. The average interest rate on one of these loans can be as much as twice that of a traditional bank loan.



Method 2 Applying for Grants.

1. Compare grants with debt financing. Like a loan, a grant is typically a one-time infusion of cash. Unlike a loan, however, you do not have to pay back the money. You can think of a grant as free money. But it can be trickier to qualify for a grant than for a loan. Typically, grants are awarded to businesses that meet special criteria. For example, non-profits, minority- or women-owned businesses and those that perform highly-technical research and development activities often qualify for grant money.

2. Find out if you qualify for federal grant money. The federal government does not give grants for starting or growing a small business. Some businesses do receive federal grant money if they are involved in something related to a policy initiative. For example, the Small Business Administration (SBA) can sometimes make grants to non-profits for education and training. Also, federal grants sometimes fund medical research, science, education and highly-technical research and development activities.

SBA grants for non-profits are announced on grants.gov.

Businesses qualifying for specific initiative grants authorized by Congress will be notified.

U.S. government's Small Business Innovation Research (SBIR) program and its Small Business Technology Transfer (STTR) programs offer grants for high-tech research and development. You can find out about these grants at SBIR.gov.

3. Find state and local grants. State and local governments sometimes offer grants to specific kinds of businesses. For example, some states offer grants for expanding child care facilities. Other initiatives for which you may find state grants include developing energy-efficient technology and creating marketing for tourism. You usually are required to match funds if you receive one of these grants. Also, the grants are typically small, so you may have to seek other forms of financing, such as a loan.

4. Apply for grants for women- or minority-owned businesses. Most states offer grants for women- or minority-owned businesses. Also, federal agencies assist women and minorities to find funding to start or expand their businesses. Finally, private funding sources are available for women- and minority-owned businesses.

Go to the business section of your state's website to find available grants. Here you will also find information about any incentives or programs your state has available for your business.

Visit the Minority Business Development Agency (MBDA) at mbda.gov. This agency is run by the U.S. Department of Commerce, and it helps minorities and women to establish and expand their businesses. Here you can research grants and find links to state funding for your business.

Private companies that fund grants for women-owned businesses include Huggies, Chase Google, InnovateHER, Fedex, Idea Cafe, the Woman Veteran Entrepreneur Corp (WVEC), Walmart and Zion's Bank.

Private companies that offer grants for minority-owned businesses include Fedex, the National Association for the Self Employed (NASE), Miller Lite and Huggies.



Method 3 Finding Investors.

1. Compare investments with other types of financing. Investments are similar to grants in that they do not have to be paid back. However, they are different from grants in that the investor contributes to the company in exchange for shares, or partial ownership, of the company. This is called equity financing. Companies who choose to find investors are typically young companies that cannot qualify for other types of financing.

2. Find venture capital investments. Venture capital is perfect for businesses that cannot qualify for traditional financing either because of their small size, early stage of development or lack of equity capital. Venture capital funds invest cash in exchange for shares in your business and an active role in running the business. These investors target young, high-growth companies. This is typically a long-term commitment that gives young companies time to grow into profitable businesses.

Find venture capital funds through the Small Business Investment Program (SBIC). This program is administered by the SBA. It licenses private funds as SBICs and links them to businesses seeking equity financing. You can find the list of licensed funds by state at www.sba.gov/content/sbic-directory.

Each venture fund is a private company with its own application process. In general, the fund begins by reviewing your business plan. Then it does due diligence on your business to evaluate the worth of the investment. If the fund decides to invest, it will take an active role in running the business with you. As your company meets milestones, more financing may be available. Venture funds typically exit the investment after four to six years via mergers, acquisitions or Initial Public Offerings (IPOs).

3. Seek an angel investor. Angel investors are high-net-worth individuals who seek lucrative investments in young, high-growth businesses. These investors may be doctors, lawyers or former entrepreneurs. The Securities and Exchange Commission (SEC) has established specific criteria for accrediting angel investors.

According to the SEC, angel investors must have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).

Angel investors give you money in exchange for shares in your company. This exchange must be registered with the SEC.

Find angel investors through networking with your local Chamber of Commerce or Small Business Development Center. Also, a trusted lawyer or accountant may be able to link you to an angel investor.

Find angel investors online at the Angel Capital Association (ACA), AngelList and MicroVentures.

4. Ask friends and family. You may have friends or family members who are willing to invest in your business. Be very careful about making this choice. Unless they are already wealthy, sophisticated investors, they may not understand the risk involved. If your business fails, you cannot easily shut it down and walk away if friends and family are partial owners. Before accepting their money, make sure they understand how easily it can be lost.

February 10, 2020

how to choose business financing

How to Choose Business Financing.

Every business needs funding for a variety of reasons, including startup, operations, equipment and project completion. Finance for business is a complex subject that must be approached from a variety of angles. There are many business financing options, some of which may or may not be right for your particular needs. In order to evaluate your situation and determine which finance avenues to pursue, there is a variety of factors to consider. Follow these guidelines to choose business financing.



Method 1 Arranging for a Loan.

1. Compare loans with other types of financing. Loans are a type of debt financing. This means that you have to pay the money back, plus interest. Loans are typically offered by banks, credit unions or other financial institutions. Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.

Equity capital is the current market value of everything the company owns less any liabilities owed by the company.

Lenders are sometimes hesitant to give loans to companies without a lot of equity capital. Without equity capital, businesses don't have much collateral to put up for a loan. Also, revenues earned by the business will go toward repaying the debt instead of growing the business.

2. Get a line of credit from a bank. A line of credit is different from a typical loan in that it doesn't give you a lump sum of cash. Rather, like a credit card, you withdraw from the available credit any time you need it. You only withdraw as much as you need. This gives you control over the amount of interest expense you will have to pay. A line of credit can help you control your cash flow as your expenses or income ebb and flow.

To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.

Annual reviews are required to maintain your line of credit.

3. Obtain a business loan from a bank. A business loan is like any other kind of term loan. Business loans come with fixed interest rates. You make monthly payments over a period of years until the loan is paid off. Unlike a line of credit, a term loan gives you a lump sum of cash up front. Businesses who are expanding their space or funding other large investments can benefit from a term business loan.

Before making a loan, lenders want to know what the loan is for and how you will spend the money. Be prepared to demonstrate that the loan is for a sound financial purpose.

Different lenders require different documents. In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.

Large banks tend to avoid working with small businesses. They don't want to do all of the work to underwrite a small loan that won't make a large profit for them.

Local banks with whom you already have done business or credit unions may be more willing to work with small businesses.

4. Apply for a commercial loan. A commercial loan is similar to a home equity loan. It is for businesses that own commercial real estate. You borrow against the equity you have in the commercial real estate you own. The amount you can borrow depends on the value of your property and how much equity you have.

Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky. Therefore, they tend to charge higher interest rates for them. Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan.

5. Request a Small Business Association (SBA) loan. These loans are given by participating banks and are guaranteed by the SBA. They are for businesses that might have trouble getting a traditional bank loan. The SBA guarantees a portion of your loan to repay if you default on your payments. Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100. Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.

SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.

SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.

Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.

Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.

Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S. Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA).

6. Work with state and local economic development agencies. Economic development agencies exist in every state and in some local municipalities. They provide low-interest loans to businesses that might not qualify for traditional bank loans. In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance. You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies. You can also contact your city or county government office to find out about their economic development programs.

Each agency has its own application process. However many require the same basic documentation. Gather the following information.

A loan application form that details why you are applying for the loan and how you will use the money.

Your resume gives lenders information about your expertise in the field.

All lenders will require a sound business plan. For help with writing your business plan, visit www.sba.gov/writing-business-plan.

Your business credit report gives lenders information about your credit worthiness.

Be prepared to submit your business and personal tax returns for the past three years.

Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements. You may also be asked to submit projected financial statements.

Be able to demonstrate your business' current financial position with accounts receivable and accounts payable information.

You may need to put up collateral, especially if you cannot provide strong financial statements.

Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases.

7. Consider online lending. Online lending services include Kabbage and OnDeck. These loans are for businesses who want small, short-term loans. Businesses turn to these lenders to handle short-term cash flow shortfalls. The application process is quick, and most applicants can complete the application in an hour. If approved, you get the money within days.

Be aware that you will pay for the convenience of the fast processing time. These loans are expensive. A typical loan from an online source costs about the same as taking a cash advance from your credit card. The average interest rate on one of these loans can be as much as twice that of a traditional bank loan.



Method 2 Applying for Grants.

1. Compare grants with debt financing. Like a loan, a grant is typically a one-time infusion of cash. Unlike a loan, however, you do not have to pay back the money. You can think of a grant as free money. But it can be trickier to qualify for a grant than for a loan. Typically, grants are awarded to businesses that meet special criteria. For example, non-profits, minority- or women-owned businesses and those that perform highly-technical research and development activities often qualify for grant money.

2. Find out if you qualify for federal grant money. The federal government does not give grants for starting or growing a small business. Some businesses do receive federal grant money if they are involved in something related to a policy initiative. For example, the Small Business Administration (SBA) can sometimes make grants to non-profits for education and training. Also, federal grants sometimes fund medical research, science, education and highly-technical research and development activities.

SBA grants for non-profits are announced on grants.gov.

Businesses qualifying for specific initiative grants authorized by Congress will be notified.

U.S. government's Small Business Innovation Research (SBIR) program and its Small Business Technology Transfer (STTR) programs offer grants for high-tech research and development. You can find out about these grants at SBIR.gov.

3. Find state and local grants. State and local governments sometimes offer grants to specific kinds of businesses. For example, some states offer grants for expanding child care facilities. Other initiatives for which you may find state grants include developing energy-efficient technology and creating marketing for tourism. You usually are required to match funds if you receive one of these grants. Also, the grants are typically small, so you may have to seek other forms of financing, such as a loan.

4. Apply for grants for women- or minority-owned businesses. Most states offer grants for women- or minority-owned businesses. Also, federal agencies assist women and minorities to find funding to start or expand their businesses. Finally, private funding sources are available for women- and minority-owned businesses.

Go to the business section of your state's website to find available grants. Here you will also find information about any incentives or programs your state has available for your business.

Visit the Minority Business Development Agency (MBDA) at mbda.gov. This agency is run by the U.S. Department of Commerce, and it helps minorities and women to establish and expand their businesses. Here you can research grants and find links to state funding for your business.

Private companies that fund grants for women-owned businesses include Huggies, Chase Google, InnovateHER, Fedex, Idea Cafe, the Woman Veteran Entrepreneur Corp (WVEC), Walmart and Zion's Bank.

Private companies that offer grants for minority-owned businesses include Fedex, the National Association for the Self Employed (NASE), Miller Lite and Huggies.



Method 3 Finding Investors.

1. Compare investments with other types of financing. Investments are similar to grants in that they do not have to be paid back. However, they are different from grants in that the investor contributes to the company in exchange for shares, or partial ownership, of the company. This is called equity financing. Companies who choose to find investors are typically young companies that cannot qualify for other types of financing.

2. Find venture capital investments. Venture capital is perfect for businesses that cannot qualify for traditional financing either because of their small size, early stage of development or lack of equity capital. Venture capital funds invest cash in exchange for shares in your business and an active role in running the business. These investors target young, high-growth companies. This is typically a long-term commitment that gives young companies time to grow into profitable businesses.

Find venture capital funds through the Small Business Investment Program (SBIC). This program is administered by the SBA. It licenses private funds as SBICs and links them to businesses seeking equity financing. You can find the list of licensed funds by state at www.sba.gov/content/sbic-directory.

Each venture fund is a private company with its own application process. In general, the fund begins by reviewing your business plan. Then it does due diligence on your business to evaluate the worth of the investment. If the fund decides to invest, it will take an active role in running the business with you. As your company meets milestones, more financing may be available. Venture funds typically exit the investment after four to six years via mergers, acquisitions or Initial Public Offerings (IPOs).

3. Seek an angel investor. Angel investors are high-net-worth individuals who seek lucrative investments in young, high-growth businesses. These investors may be doctors, lawyers or former entrepreneurs. The Securities and Exchange Commission (SEC) has established specific criteria for accrediting angel investors.

According to the SEC, angel investors must have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).

Angel investors give you money in exchange for shares in your company. This exchange must be registered with the SEC.

Find angel investors through networking with your local Chamber of Commerce or Small Business Development Center. Also, a trusted lawyer or accountant may be able to link you to an angel investor.

Find angel investors online at the Angel Capital Association (ACA), AngelList and MicroVentures.

4. Ask friends and family. You may have friends or family members who are willing to invest in your business. Be very careful about making this choice. Unless they are already wealthy, sophisticated investors, they may not understand the risk involved. If your business fails, you cannot easily shut it down and walk away if friends and family are partial owners. Before accepting their money, make sure they understand how easily it can be lost.

February 09, 2020

How to Choose Business Financing.

How to Choose Business Financing.

Every business needs funding for a variety of reasons, including startup, operations, equipment and project completion. Finance for business is a complex subject that must be approached from a variety of angles. There are many business financing options, some of which may or may not be right for your particular needs. In order to evaluate your situation and determine which finance avenues to pursue, there is a variety of factors to consider. Follow these guidelines to choose business financing.

Method 1 Arranging for a Loan.

1. Compare loans with other types of financing. Loans are a type of debt financing. This means that you have to pay the money back, plus interest. Loans are typically offered by banks, credit unions or other financial institutions. Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.

Equity capital is the current market value of everything the company owns less any liabilities owed by the company.

Lenders are sometimes hesitant to give loans to companies without a lot of equity capital. Without equity capital, businesses don't have much collateral to put up for a loan. Also, revenues earned by the business will go toward repaying the debt instead of growing the business.

2. Get a line of credit from a bank. A line of credit is different from a typical loan in that it doesn't give you a lump sum of cash. Rather, like a credit card, you withdraw from the available credit any time you need it. You only withdraw as much as you need. This gives you control over the amount of interest expense you will have to pay. A line of credit can help you control your cash flow as your expenses or income ebb and flow.

To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.

Annual reviews are required to maintain your line of credit.

3. Obtain a business loan from a bank. A business loan is like any other kind of term loan. Business loans come with fixed interest rates. You make monthly payments over a period of years until the loan is paid off. Unlike a line of credit, a term loan gives you a lump sum of cash up front. Businesses who are expanding their space or funding other large investments can benefit from a term business loan.

Before making a loan, lenders want to know what the loan is for and how you will spend the money. Be prepared to demonstrate that the loan is for a sound financial purpose.

Different lenders require different documents. In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.

Large banks tend to avoid working with small businesses. They don't want to do all of the work to underwrite a small loan that won't make a large profit for them.

Local banks with whom you already have done business or credit unions may be more willing to work with small businesses.

4. Apply for a commercial loan. A commercial loan is similar to a home equity loan. It is for businesses that own commercial real estate. You borrow against the equity you have in the commercial real estate you own. The amount you can borrow depends on the value of your property and how much equity you have.

Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky. Therefore, they tend to charge higher interest rates for them. Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan.

5. Request a Small Business Association (SBA) loan. These loans are given by participating banks and are guaranteed by the SBA. They are for businesses that might have trouble getting a traditional bank loan. The SBA guarantees a portion of your loan to repay if you default on your payments. Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100. Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.

SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.

SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.

Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.

Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.

Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S. Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA).

6. Work with state and local economic development agencies. Economic development agencies exist in every state and in some local municipalities. They provide low-interest loans to businesses that might not qualify for traditional bank loans. In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance. You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies. You can also contact your city or county government office to find out about their economic development programs.

Each agency has its own application process. However many require the same basic documentation. Gather the following information.

A loan application form that details why you are applying for the loan and how you will use the money.

Your resume gives lenders information about your expertise in the field.

All lenders will require a sound business plan. For help with writing your business plan, visit www.sba.gov/writing-business-plan.

Your business credit report gives lenders information about your credit worthiness.

Be prepared to submit your business and personal tax returns for the past three years.

Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements. You may also be asked to submit projected financial statements.

Be able to demonstrate your business' current financial position with accounts receivable and accounts payable information.

You may need to put up collateral, especially if you cannot provide strong financial statements.

Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases.

7. Consider online lending. Online lending services include Kabbage and OnDeck. These loans are for businesses who want small, short-term loans. Businesses turn to these lenders to handle short-term cash flow shortfalls. The application process is quick, and most applicants can complete the application in an hour. If approved, you get the money within days.

Be aware that you will pay for the convenience of the fast processing time. These loans are expensive. A typical loan from an online source costs about the same as taking a cash advance from your credit card. The average interest rate on one of these loans can be as much as twice that of a traditional bank loan.

Method 2 Applying for Grants.

1. Compare grants with debt financing. Like a loan, a grant is typically a one-time infusion of cash. Unlike a loan, however, you do not have to pay back the money. You can think of a grant as free money. But it can be trickier to qualify for a grant than for a loan. Typically, grants are awarded to businesses that meet special criteria. For example, non-profits, minority- or women-owned businesses and those that perform highly-technical research and development activities often qualify for grant money.

2. Find out if you qualify for federal grant money. The federal government does not give grants for starting or growing a small business. Some businesses do receive federal grant money if they are involved in something related to a policy initiative. For example, the Small Business Administration (SBA) can sometimes make grants to non-profits for education and training. Also, federal grants sometimes fund medical research, science, education and highly-technical research and development activities.

SBA grants for non-profits are announced on grants.gov.

Businesses qualifying for specific initiative grants authorized by Congress will be notified.

U.S. government's Small Business Innovation Research (SBIR) program and its Small Business Technology Transfer (STTR) programs offer grants for high-tech research and development. You can find out about these grants at SBIR.gov.

3. Find state and local grants. State and local governments sometimes offer grants to specific kinds of businesses. For example, some states offer grants for expanding child care facilities. Other initiatives for which you may find state grants include developing energy-efficient technology and creating marketing for tourism. You usually are required to match funds if you receive one of these grants. Also, the grants are typically small, so you may have to seek other forms of financing, such as a loan.

4. Apply for grants for women- or minority-owned businesses. Most states offer grants for women- or minority-owned businesses. Also, federal agencies assist women and minorities to find funding to start or expand their businesses. Finally, private funding sources are available for women- and minority-owned businesses.

Go to the business section of your state's website to find available grants. Here you will also find information about any incentives or programs your state has available for your business.

Visit the Minority Business Development Agency (MBDA) at mbda.gov. This agency is run by the U.S. Department of Commerce, and it helps minorities and women to establish and expand their businesses. Here you can research grants and find links to state funding for your business.

Private companies that fund grants for women-owned businesses include Huggies, Chase Google, InnovateHER, Fedex, Idea Cafe, the Woman Veteran Entrepreneur Corp (WVEC), Walmart and Zion's Bank.

Private companies that offer grants for minority-owned businesses include Fedex, the National Association for the Self Employed (NASE), Miller Lite and Huggies.[15]

Method 3 Finding Investors.

1. Compare investments with other types of financing. Investments are similar to grants in that they do not have to be paid back. However, they are different from grants in that the investor contributes to the company in exchange for shares, or partial ownership, of the company. This is called equity financing. Companies who choose to find investors are typically young companies that cannot qualify for other types of financing.

2. Find venture capital investments. Venture capital is perfect for businesses that cannot qualify for traditional financing either because of their small size, early stage of development or lack of equity capital. Venture capital funds invest cash in exchange for shares in your business and an active role in running the business. These investors target young, high-growth companies. This is typically a long-term commitment that gives young companies time to grow into profitable businesses.

Find venture capital funds through the Small Business Investment Program (SBIC). This program is administered by the SBA. It licenses private funds as SBICs and links them to businesses seeking equity financing. You can find the list of licensed funds by state at www.sba.gov/content/sbic-directory.

Each venture fund is a private company with its own application process. In general, the fund begins by reviewing your business plan. Then it does due diligence on your business to evaluate the worth of the investment. If the fund decides to invest, it will take an active role in running the business with you. As your company meets milestones, more financing may be available. Venture funds typically exit the investment after four to six years via mergers, acquisitions or Initial Public Offerings (IPOs).

3. Seek an angel investor. Angel investors are high-net-worth individuals who seek lucrative investments in young, high-growth businesses. These investors may be doctors, lawyers or former entrepreneurs. The Securities and Exchange Commission (SEC) has established specific criteria for accrediting angel investors.

According to the SEC, angel investors must have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).

Angel investors give you money in exchange for shares in your company. This exchange must be registered with the SEC.

Find angel investors through networking with your local Chamber of Commerce or Small Business Development Center. Also, a trusted lawyer or accountant may be able to link you to an angel investor.

Find angel investors online at the Angel Capital Association (ACA), AngelList and MicroVentures.

4. Ask friends and family. You may have friends or family members who are willing to invest in your business. Be very careful about making this choice. Unless they are already wealthy, sophisticated investors, they may not understand the risk involved. If your business fails, you cannot easily shut it down and walk away if friends and family are partial owners. Before accepting their money, make sure they understand how easily it can be lost.

December 19, 2019

how to choose business financing

How to Choose Business Financing.

Every business needs funding for a variety of reasons, including startup, operations, equipment and project completion. Finance for business is a complex subject that must be approached from a variety of angles. There are many business financing options, some of which may or may not be right for your particular needs. In order to evaluate your situation and determine which finance avenues to pursue, there is a variety of factors to consider. Follow these guidelines to choose business financing.

Method 1 Arranging for a Loan.

1. Compare loans with other types of financing. Loans are a type of debt financing. This means that you have to pay the money back, plus interest. Loans are typically offered by banks, credit unions or other financial institutions. Businesses that typically qualify for loans have a strong business plan, favorable business credit rating and a fair amount of equity capital.

Equity capital is the current market value of everything the company owns less any liabilities owed by the company.

Lenders are sometimes hesitant to give loans to companies without a lot of equity capital. Without equity capital, businesses don't have much collateral to put up for a loan. Also, revenues earned by the business will go toward repaying the debt instead of growing the business.

2. Get a line of credit from a bank. A line of credit is different from a typical loan in that it doesn't give you a lump sum of cash. Rather, like a credit card, you withdraw from the available credit any time you need it. You only withdraw as much as you need. This gives you control over the amount of interest expense you will have to pay. A line of credit can help you control your cash flow as your expenses or income ebb and flow.

To qualify for a line of credit, be prepared to submit financial statements, personal tax returns, business tax returns, bank account information and business registration documents.

Annual reviews are required to maintain your line of credit.

3. Obtain a business loan from a bank. A business loan is like any other kind of term loan. Business loans come with fixed interest rates. You make monthly payments over a period of years until the loan is paid off. Unlike a line of credit, a term loan gives you a lump sum of cash up front. Businesses who are expanding their space or funding other large investments can benefit from a term business loan.

Before making a loan, lenders want to know what the loan is for and how you will spend the money. Be prepared to demonstrate that the loan is for a sound financial purpose.

Different lenders require different documents. In general, be prepared to produce: your personal and business credit history; personal and business financial statements for existing and startup businesses; projected financial statements; a strong, detailed business plan; cash flow projections for at least a year; and personal guaranties from all principal owners of the business.

Large banks tend to avoid working with small businesses. They don't want to do all of the work to underwrite a small loan that won't make a large profit for them.

Local banks with whom you already have done business or credit unions may be more willing to work with small businesses.

4. Apply for a commercial loan. A commercial loan is similar to a home equity loan. It is for businesses that own commercial real estate. You borrow against the equity you have in the commercial real estate you own. The amount you can borrow depends on the value of your property and how much equity you have.

Commercial loans are not backed by government entities like Fannie Mae, so lenders see these loans as risky. Therefore, they tend to charge higher interest rates for them. Also lenders scrutinize the business more closely as well as the real estate that will serve as collateral for the loan.

5. Request a Small Business Association (SBA) loan. These loans are given by participating banks and are guaranteed by the SBA. They are for businesses that might have trouble getting a traditional bank loan. The SBA guarantees a portion of your loan to repay if you default on your payments. Find a bank that works with SBA loans by visiting www.sba.gov/lenders-top-100. Use the application checklist (www.sba.gov/content/sba-loan-application-checklist) to make sure you have all of the necessary documentation.

SBA loans for starting and expanding a business include the Basic 7(a) Loan Program, the Certified Development Company (CDC) 504 Loan Program and the Microloan Program.

SBA also offers disaster assistance loans for businesses in a declared disaster area and economic injury loans for businesses that have suffered a physical or agricultural production disaster.

Export assistance loans help exporters obtain financing to support exporting activities or to compete if they have been adversely affected by competition from imports.

Veteran and military community loans help businesses meet expenses when an essential employee has been called up on active duty.

Other special purpose loans include CAPlines, which help businesses purchase capital equipment, pollution control loans for pollution control facilities, and the U.S. Community Adjustment And Investment Program (CAIP), for businesses that have been adversely affected by the North American Free Trade Agreement (NAFTA).

6. Work with state and local economic development agencies. Economic development agencies exist in every state and in some local municipalities. They provide low-interest loans to businesses that might not qualify for traditional bank loans. In addition to financial services, these agencies provide startup advice, training, business location selection assistance and employee recruitment and training assistance. You can find the economic development agency in your state by visiting www.sba.gov/content/economic-development-agencies. You can also contact your city or county government office to find out about their economic development programs.

Each agency has its own application process. However many require the same basic documentation. Gather the following information.

A loan application form that details why you are applying for the loan and how you will use the money.

Your resume gives lenders information about your expertise in the field.

All lenders will require a sound business plan. For help with writing your business plan, visit www.sba.gov/writing-business-plan.

Your business credit report gives lenders information about your credit worthiness.

Be prepared to submit your business and personal tax returns for the past three years.

Prepare historical financial statements, including your balance sheet, income statement, cash flow statement and bank statements. You may also be asked to submit projected financial statements.

Be able to demonstrate your business' current financial position with accounts receivable and accounts payable information.

You may need to put up collateral, especially if you cannot provide strong financial statements.

Gather important legal documents, including your business license, articles of incorporation, third party contracts, franchise agreements and commercial leases.

7. Consider online lending. Online lending services include Kabbage and OnDeck. These loans are for businesses who want small, short-term loans. Businesses turn to these lenders to handle short-term cash flow shortfalls. The application process is quick, and most applicants can complete the application in an hour. If approved, you get the money within days.

Be aware that you will pay for the convenience of the fast processing time. These loans are expensive. A typical loan from an online source costs about the same as taking a cash advance from your credit card. The average interest rate on one of these loans can be as much as twice that of a traditional bank loan.

Method 2 Applying for Grants.

1. Compare grants with debt financing. Like a loan, a grant is typically a one-time infusion of cash. Unlike a loan, however, you do not have to pay back the money. You can think of a grant as free money. But it can be trickier to qualify for a grant than for a loan. Typically, grants are awarded to businesses that meet special criteria. For example, non-profits, minority- or women-owned businesses and those that perform highly-technical research and development activities often qualify for grant money.

2. Find out if you qualify for federal grant money. The federal government does not give grants for starting or growing a small business. Some businesses do receive federal grant money if they are involved in something related to a policy initiative. For example, the Small Business Administration (SBA) can sometimes make grants to non-profits for education and training. Also, federal grants sometimes fund medical research, science, education and highly-technical research and development activities.

SBA grants for non-profits are announced on grants.gov.

Businesses qualifying for specific initiative grants authorized by Congress will be notified.

U.S. government's Small Business Innovation Research (SBIR) program and its Small Business Technology Transfer (STTR) programs offer grants for high-tech research and development. You can find out about these grants at SBIR.gov.

3. Find state and local grants. State and local governments sometimes offer grants to specific kinds of businesses. For example, some states offer grants for expanding child care facilities. Other initiatives for which you may find state grants include developing energy-efficient technology and creating marketing for tourism. You usually are required to match funds if you receive one of these grants. Also, the grants are typically small, so you may have to seek other forms of financing, such as a loan.

4. Apply for grants for women- or minority-owned businesses. Most states offer grants for women- or minority-owned businesses. Also, federal agencies assist women and minorities to find funding to start or expand their businesses. Finally, private funding sources are available for women- and minority-owned businesses.

Go to the business section of your state's website to find available grants. Here you will also find information about any incentives or programs your state has available for your business.

Visit the Minority Business Development Agency (MBDA) at mbda.gov. This agency is run by the U.S. Department of Commerce, and it helps minorities and women to establish and expand their businesses. Here you can research grants and find links to state funding for your business.

Private companies that fund grants for women-owned businesses include Huggies, Chase Google, InnovateHER, Fedex, Idea Cafe, the Woman Veteran Entrepreneur Corp (WVEC), Walmart and Zion's Bank.

Private companies that offer grants for minority-owned businesses include Fedex, the National Association for the Self Employed (NASE), Miller Lite and Huggies.[15]

Method 3 Finding Investors.

1. Compare investments with other types of financing. Investments are similar to grants in that they do not have to be paid back. However, they are different from grants in that the investor contributes to the company in exchange for shares, or partial ownership, of the company. This is called equity financing. Companies who choose to find investors are typically young companies that cannot qualify for other types of financing.

2. Find venture capital investments. Venture capital is perfect for businesses that cannot qualify for traditional financing either because of their small size, early stage of development or lack of equity capital. Venture capital funds invest cash in exchange for shares in your business and an active role in running the business. These investors target young, high-growth companies. This is typically a long-term commitment that gives young companies time to grow into profitable businesses.

Find venture capital funds through the Small Business Investment Program (SBIC). This program is administered by the SBA. It licenses private funds as SBICs and links them to businesses seeking equity financing. You can find the list of licensed funds by state at www.sba.gov/content/sbic-directory.

Each venture fund is a private company with its own application process. In general, the fund begins by reviewing your business plan. Then it does due diligence on your business to evaluate the worth of the investment. If the fund decides to invest, it will take an active role in running the business with you. As your company meets milestones, more financing may be available. Venture funds typically exit the investment after four to six years via mergers, acquisitions or Initial Public Offerings (IPOs).

3. Seek an angel investor. Angel investors are high-net-worth individuals who seek lucrative investments in young, high-growth businesses. These investors may be doctors, lawyers or former entrepreneurs. The Securities and Exchange Commission (SEC) has established specific criteria for accrediting angel investors.

According to the SEC, angel investors must have a net worth of at least $1 million and make $200,000 a year (or $300,000 a year jointly with a spouse).

Angel investors give you money in exchange for shares in your company. This exchange must be registered with the SEC.

Find angel investors through networking with your local Chamber of Commerce or Small Business Development Center. Also, a trusted lawyer or accountant may be able to link you to an angel investor.

Find angel investors online at the Angel Capital Association (ACA), AngelList and MicroVentures.

4. Ask friends and family. You may have friends or family members who are willing to invest in your business. Be very careful about making this choice. Unless they are already wealthy, sophisticated investors, they may not understand the risk involved. If your business fails, you cannot easily shut it down and walk away if friends and family are partial owners. Before accepting their money, make sure they understand how easily it can be lost.

December 18, 2019

How to Calculate Finance Charges on a New Car Loan

How to Calculate Finance Charges on a New Car Loan.

While some people save until they can buy a car in full, most people take out a car loan. This makes newer and better cars more accessible to everyone. However, it also makes car ownership even more expensive in the long run. Before taking out a loan, you should consider the additional money you will pay in interest for the duration of your loan. These payments, also known as finance charges, will be included in your payments and can be calculated either as monthly payments or as a sum total over the life of your loan.

Part 1 Clarifying the Terms of Your Loan.

1. Determine how much you will borrow. Typically, buyers will make a cash down payment on their new car and borrow from a lender to cover the remaining cost. This borrowed amount, known as the principal, will serve as the basis for your car loan. Keep in mind that you should put as much money down on your car as possible to minimize the amount borrowed and reduce your finance charges.

This step will require you to know roughly how much your new car will cost. See How to Buy a New Car for more information about finding a good price and working within your budget.

2. Figure out the annual percentage rate (APR) and duration of your loan. The APR reflects how much additional money you will have to pay beyond your principal for each year of your loan. A low APR will reduce the yearly and monthly amounts of finance charges on your loan. However, many low-APR loans are longer in duration, so the overall cost may remain relatively high. Alternately, a short-term loan with a higher APR may end up being cheaper overall. This is why it is important to calculate your finance charges beforehand.

Getting a low APR on your car loan may mean seeking other lenders beyond your car dealership. Be sure to do your research and select the cheapest available combination of APR and duration. See How to Get a Low APR on a Car Loan for more information.

3. Find out how many payments you will make each year. The majority of car loan payments are made on a monthly basis. When calculating your monthly payments, you will need to know both how many payments you will make each year and how many payments you will make in total. This information can be easily found in the terms of your car loan.

Part 2 Calculating Your Monthly Finance Charges.

1. Save time by using an online calculator. There are many car loan payment calculators available for free online. Take advantage of these free services if you don't want to spend the time calculating your payments yourself. Search "Car loan payment calculator" and you will be provided with many options. If you still want to work it out by hand, continue to the next step.

2. Find your interest rate due on each payment. Start by converting your APR to a decimal by dividing it by 100. For example, if your APR is stated at 8.4%, 8.4/100 = 0.084. Next, find your monthly percentage rate by dividing your APR decimal by 12. So, 0.084/12 = 0.007. This is your monthly percentage rate expressed as a decimal.

3. Multiply your monthly percentage rate times your principal. If, for example, your principal were $20,000 (if you borrowed $20,000 to buy your car), you would multiply this by 0.007 (from the previous step) and get 140.

4. Input this number into the monthly payment formula. The formula is as follows: Monthly Payment = (Interest rate due on each payment x principal)/ (1 – (1 + Interest rate due on each payment)^ -(Number of payments)). The top part of the equation (interest rate due on each payment x principal) is your number from the previous step. The rest can be calculated using a simple calculator.

The "^" indicates that the figure (-(Number of Payments)) is an exponent to the figure (1 + Interest rate due on each payment). On a calculator, this is entered by calculating 1 + interest rate due on each payment, hitting the button x^y, and then entering the number of payments. Keep in mind that the number of payments is made negative here (multiplied by negative one).

In our example, the calculation would go as follows (assuming a loan duration of 5 years or 60 months):

Monthly Payment = (0.007 x $20000)/(1-(1+ 0.007)^-60.

Monthly payment = $140/(1-(1.007)^-60).

Monthly payment = $140/(1-0.658).

Monthly payment = $140/0.342.

Monthly payment = $409.36 (this number may be off by a few cents due to rounding).

5. Calculate the amount of principal paid each month. This is done by simply dividing your principal amount by the duration of your loan in months. For our example, this would be $20,000/60 months = $333.33/month.

6. Subtract your principal paid each month from your monthly payment. In our example, this would be $409.36 - $333.33. This equals roughly $76. So, with this loan agreement, you would be spending $76 per month in interest payments alone.

Part 3 Calculating Your Loan's Total Finance Charges.

1. Find your monthly payment. To find your total finance charges over the life of your loan, start by calculating your monthly payment. How to do this is explained in the previous section.

2. Plug that number into the total finance charges formula. The formula is as follows: Monthly Payment Amount x Number of Payments – Amount Borrowed = Total Amount of Finance Charges.

So, in our example, this would be.

$409 x 60 - $20,000 = Total amount of finance charges.

$24,540 - $20,000 = Total amount of finance charges.

Total amount of finance charges = $4,540.

3. Check your work. To be sure that you calculated your total correctly, divide that number by the total number of payments (60, in this case). $4,540/60 = 76. If the result matches your monthly finance charges you calculated earlier, then you have the correct number for total finance charges.

Tips.

Use this process to compare loan plans to ensure that you end up with the lowest possible value for overall finance charges.

Using an online loan calculator will always be simpler and more convenient than working out the numbers on your own. These online calculators are always accurate.

The calculator included on most smartphones is capable of doing the math here. If you don't have a smart phone or calculator to use, try typing your equation into Google's search bar, as it will solve most simple problems.

With good credit and a large down payment, it may be possible to get a car loan with 0% APR.

Warnings.

While uncommon, some lenders can use a more complicated form of interest called compound interest that will throw off these calculations. Be sure to ask if your car loan charges simple interest (the kind described in this article) before counting on these equations.

November 28, 2019

How to Reduce Finance Charges on a Car Loan

How to Reduce Finance Charges on a Car Loan.

Finance charges applied to a car loan are the actual charges for the cost of borrowing the money needed to purchase your car. The finance charge that is associated with your car loan is directly contingent upon three variables: loan amount, interest rate, and loan term. Modifying any or all of these variables will change the amount of finance charges you will pay for the loan. There are a number of ways to reduce finance charges on a loan, and the method you choose will be contingent upon whether you already have a loan or are taking out a new loan. Knowing your options can help you save money and pay off your vehicle faster.

Method 1 Reducing Finance Charges for a New Loan.

1. Learn your credit score. Automobile loans are largely determined by the borrower's credit score; the better the borrower's credit score is, the lower his interest rate will likely be. Knowing your credit score before you apply for an automobile loan can help ensure that you get the best possible loan terms. You can obtain a free copy of your credit report (one free copy is guaranteed every 12 months) by visiting AnnualCreditReport.com or by calling 1-877-322-8228.

Your credit report won't explicitly contain your credit score, but it will contain information that determines your credit score. Because of this, it's tremendously important to review all of the information contained in your credit report and understand what determines your credit score to ensure that there are no errors.

If your credit score is low, you may need to improve your credit score. Improving your credit score will likely get you much better terms on your loan. If you can hold off on purchasing your vehicle until you've repaired your credit, it may be worth waiting.

Consider contacting a credit counseling organization to help you rebuild your credit. A credit counselor can work with you to build and stick to a budget, and can even help you manage your income and your debts. You can find a credit counseling organization near you by searching online - just be clear on the terms and fees of the services offered before signing up with a credit counselor.

2. Shop around for your loan. Most dealerships offer automobile loans at the dealership, which can make it convenient for buyers. However, the dealership may not be offering the best available loan. Many automobile dealers arrange loans by acting as a "middle man" between you and a bank, which means that the dealership may charge you extra to compensate for its services. Even if the dealership's fees aren't unreasonable, it's likely that the dealer will then sell your contract to a bank, credit union, or finance company, and you may end up making payments to that third party. Even if you end up going with the dealer's financing option, it's worth shopping around for a better loan from a local bank or credit union.

3. Don't take out a small loan. Every loan term is different, depending on factors like your credit score and the amount you're requesting to borrow. Smaller loans typically have very high monthly finance charges, because the bank makes money off of these charges and they know that a smaller loan will be paid off more quickly. If you intend to take out an auto loan for only a few thousand dollars, it may be worth saving up until you have the whole amount that you'll need to purchase an automobile, or purchasing an automobile that fits in your available price range.

4. Get a pre-approved loan before you buy a car. Pre-approved loans are arranged in advance with a bank or financial institution. This may be helpful, as many people feel pressured to go with the loan options that a dealer offers at the car lot, and end up getting a loan with high finance charges. If you get a pre-approved loan beforehand, you'll know exactly how much you can afford to spend on an automobile, which will also help you stay within your budget.

5. Consider leasing instead of buying. Leasing a vehicle allows you to use your vehicle for an arranged duration of time and a predetermined number of miles. You won't own your car, but lease payments are typically lower than what the monthly payments on a loan would be for the exact same vehicle. Some lease terms also give you the option of purchasing your vehicle at the end of the leasing period. Before you decide to lease, it may be helpful to consider.

the lease costs at the beginning, middle, and end of the leasing period.

what leasing offers and terms are available to you.

how long you want to keep the automobile.

Method 2 Refinancing an Existing Loan.

1. Contact your lender. You can apply to refinance your automobile loan with the lender from the original loan, or you can switch to a new lender. Lenders who allow refinancing will replace your existing loan with a new loan, typically offering lower monthly finance charges. Not every lender will allow borrowers to refinance a loan, so it may be worth comparing your options to determine which lender to go with, or whether you're eligible to refinance at all.

2. Gather the necessary information. As part of the refinancing application process, you'll need some basic information to provide the lender. Before you apply to refinance your loan, you'll need to have ready:

your current interest rate.

how much money is still owed on the existing loan.

how many months remain in the existing loan's terms.

the make, model, and current odometer reading of your vehicle.

the current value of your vehicle.

your current income and employment history.

your current credit score.

3. Compare refinance loan options. If you are eligible for an automobile loan refinance with your existing lender, you may be eligible for a better loan through a different lending institution. It's worth comparing your refinance loan options to get the best available loan terms. When you search around and compare refinance options, it's worth considering:

the loan rate.

the duration of the loan.

whether there are pre-payment penalties or late payment penalties.

any fees or finance charges.

what (if any) the conditions for automobile repossession are with a given lender.

Method 3 Pre-paying an Existing Loan.

1. Learn whether you're able to pre-pay your loan. If refinancing isn't an option, you may be eligible for pre-paying your loan. Pre-payment, also called early loan payoff, simply means that you pay off your debt before the agreed-upon end date of an existing loan.[29] The benefit of pre-paying your loan is that you're not subjected to the monthly finance charges you would otherwise be paying on your loan, but for that reason many lenders charge a pre-payment penalty or fee.[30] The terms of your existing loan should specify whether there is any pre-payment or early loan payoff penalty, but if you're unsure you can always consult with your lender.

2. Learn the pre-payment process for your lender. If your lender permits you to make pre-payments on your loan, there may be a special process for making those payments. These payments are sometimes referred to as principal-only payments, and it's important to specify to your lender that you intend for that payment to be applied to the principal loan, not the finance charges for upcoming months. Each lender's process may be different, so it's best to call or email the lender's customer service department and ask what you need to do to make a principal-only payment towards your loan.

3. Calculate your early loan payoff amount. There are many early loan payoff "calculators" available online, but all of them factor in the same basic information to determine how much you will need to pay in order to payoff your loan early:

the total number of months in your existing loan term.

the number of months remaining on your existing loan.

the amount your existing loan was for.

the monthly payments remaining on your loan.

the current annual interest rate (APR) on your existing loan.

Tips.

Reducing the finance charges by reducing the term of the loan will lower the finance charges overall but it will also increase your monthly payment, because you take less time to repay the loan.

Consider working with a credit counseling organization if you're having trouble sticking with your budget or paying off your loans.

November 28, 2019

how to calculate finance charges on a new car loan

How to Calculate Finance Charges on a New Car Loan.

While some people save until they can buy a car in full, most people take out a car loan. This makes newer and better cars more accessible to everyone. However, it also makes car ownership even more expensive in the long run. Before taking out a loan, you should consider the additional money you will pay in interest for the duration of your loan. These payments, also known as finance charges, will be included in your payments and can be calculated either as monthly payments or as a sum total over the life of your loan.

Part 1 Clarifying the Terms of Your Loan.

1. Determine how much you will borrow. Typically, buyers will make a cash down payment on their new car and borrow from a lender to cover the remaining cost. This borrowed amount, known as the principal, will serve as the basis for your car loan. Keep in mind that you should put as much money down on your car as possible to minimize the amount borrowed and reduce your finance charges.

This step will require you to know roughly how much your new car will cost. See How to Buy a New Car for more information about finding a good price and working within your budget.

2. Figure out the annual percentage rate (APR) and duration of your loan. The APR reflects how much additional money you will have to pay beyond your principal for each year of your loan. A low APR will reduce the yearly and monthly amounts of finance charges on your loan. However, many low-APR loans are longer in duration, so the overall cost may remain relatively high. Alternately, a short-term loan with a higher APR may end up being cheaper overall. This is why it is important to calculate your finance charges beforehand.

Getting a low APR on your car loan may mean seeking other lenders beyond your car dealership. Be sure to do your research and select the cheapest available combination of APR and duration. See How to Get a Low APR on a Car Loan for more information.

3. Find out how many payments you will make each year. The majority of car loan payments are made on a monthly basis. When calculating your monthly payments, you will need to know both how many payments you will make each year and how many payments you will make in total. This information can be easily found in the terms of your car loan.

Part 2 Calculating Your Monthly Finance Charges.

1. Save time by using an online calculator. There are many car loan payment calculators available for free online. Take advantage of these free services if you don't want to spend the time calculating your payments yourself. Search "Car loan payment calculator" and you will be provided with many options. If you still want to work it out by hand, continue to the next step.

2. Find your interest rate due on each payment. Start by converting your APR to a decimal by dividing it by 100. For example, if your APR is stated at 8.4%, 8.4/100 = 0.084. Next, find your monthly percentage rate by dividing your APR decimal by 12. So, 0.084/12 = 0.007. This is your monthly percentage rate expressed as a decimal.

3. Multiply your monthly percentage rate times your principal. If, for example, your principal were $20,000 (if you borrowed $20,000 to buy your car), you would multiply this by 0.007 (from the previous step) and get 140.

4. Input this number into the monthly payment formula. The formula is as follows: Monthly Payment = (Interest rate due on each payment x principal)/ (1 – (1 + Interest rate due on each payment)^ -(Number of payments)). The top part of the equation (interest rate due on each payment x principal) is your number from the previous step. The rest can be calculated using a simple calculator.

The "^" indicates that the figure (-(Number of Payments)) is an exponent to the figure (1 + Interest rate due on each payment). On a calculator, this is entered by calculating 1 + interest rate due on each payment, hitting the button x^y, and then entering the number of payments. Keep in mind that the number of payments is made negative here (multiplied by negative one).

In our example, the calculation would go as follows (assuming a loan duration of 5 years or 60 months):

Monthly Payment = (0.007 x $20000)/(1-(1+ 0.007)^-60.

Monthly payment = $140/(1-(1.007)^-60).

Monthly payment = $140/(1-0.658).

Monthly payment = $140/0.342.

Monthly payment = $409.36 (this number may be off by a few cents due to rounding).

5. Calculate the amount of principal paid each month. This is done by simply dividing your principal amount by the duration of your loan in months. For our example, this would be $20,000/60 months = $333.33/month.

6. Subtract your principal paid each month from your monthly payment. In our example, this would be $409.36 - $333.33. This equals roughly $76. So, with this loan agreement, you would be spending $76 per month in interest payments alone.

Part 3 Calculating Your Loan's Total Finance Charges.

1. Find your monthly payment. To find your total finance charges over the life of your loan, start by calculating your monthly payment. How to do this is explained in the previous section.

2. Plug that number into the total finance charges formula. The formula is as follows: Monthly Payment Amount x Number of Payments – Amount Borrowed = Total Amount of Finance Charges.

So, in our example, this would be.

$409 x 60 - $20,000 = Total amount of finance charges.

$24,540 - $20,000 = Total amount of finance charges.

Total amount of finance charges = $4,540.

3. Check your work. To be sure that you calculated your total correctly, divide that number by the total number of payments (60, in this case). $4,540/60 = 76. If the result matches your monthly finance charges you calculated earlier, then you have the correct number for total finance charges.

Tips.

Use this process to compare loan plans to ensure that you end up with the lowest possible value for overall finance charges.

Using an online loan calculator will always be simpler and more convenient than working out the numbers on your own. These online calculators are always accurate.

The calculator included on most smartphones is capable of doing the math here. If you don't have a smart phone or calculator to use, try typing your equation into Google's search bar, as it will solve most simple problems.

With good credit and a large down payment, it may be possible to get a car loan with 0% APR.

Warnings.

While uncommon, some lenders can use a more complicated form of interest called compound interest that will throw off these calculations. Be sure to ask if your car loan charges simple interest (the kind described in this article) before counting on these equations.

November 28, 2019

how to reduce finance charges on a car loan

How to Reduce Finance Charges on a Car Loan.

Finance charges applied to a car loan are the actual charges for the cost of borrowing the money needed to purchase your car. The finance charge that is associated with your car loan is directly contingent upon three variables: loan amount, interest rate, and loan term. Modifying any or all of these variables will change the amount of finance charges you will pay for the loan. There are a number of ways to reduce finance charges on a loan, and the method you choose will be contingent upon whether you already have a loan or are taking out a new loan. Knowing your options can help you save money and pay off your vehicle faster.

Method 1 Reducing Finance Charges for a New Loan.

1. Learn your credit score. Automobile loans are largely determined by the borrower's credit score; the better the borrower's credit score is, the lower his interest rate will likely be. Knowing your credit score before you apply for an automobile loan can help ensure that you get the best possible loan terms. You can obtain a free copy of your credit report (one free copy is guaranteed every 12 months) by visiting AnnualCreditReport.com or by calling 1-877-322-8228.

Your credit report won't explicitly contain your credit score, but it will contain information that determines your credit score. Because of this, it's tremendously important to review all of the information contained in your credit report and understand what determines your credit score to ensure that there are no errors.

If your credit score is low, you may need to improve your credit score. Improving your credit score will likely get you much better terms on your loan. If you can hold off on purchasing your vehicle until you've repaired your credit, it may be worth waiting.

Consider contacting a credit counseling organization to help you rebuild your credit. A credit counselor can work with you to build and stick to a budget, and can even help you manage your income and your debts. You can find a credit counseling organization near you by searching online - just be clear on the terms and fees of the services offered before signing up with a credit counselor.

2. Shop around for your loan. Most dealerships offer automobile loans at the dealership, which can make it convenient for buyers. However, the dealership may not be offering the best available loan. Many automobile dealers arrange loans by acting as a "middle man" between you and a bank, which means that the dealership may charge you extra to compensate for its services. Even if the dealership's fees aren't unreasonable, it's likely that the dealer will then sell your contract to a bank, credit union, or finance company, and you may end up making payments to that third party. Even if you end up going with the dealer's financing option, it's worth shopping around for a better loan from a local bank or credit union.

3. Don't take out a small loan. Every loan term is different, depending on factors like your credit score and the amount you're requesting to borrow. Smaller loans typically have very high monthly finance charges, because the bank makes money off of these charges and they know that a smaller loan will be paid off more quickly. If you intend to take out an auto loan for only a few thousand dollars, it may be worth saving up until you have the whole amount that you'll need to purchase an automobile, or purchasing an automobile that fits in your available price range.

4. Get a pre-approved loan before you buy a car. Pre-approved loans are arranged in advance with a bank or financial institution. This may be helpful, as many people feel pressured to go with the loan options that a dealer offers at the car lot, and end up getting a loan with high finance charges. If you get a pre-approved loan beforehand, you'll know exactly how much you can afford to spend on an automobile, which will also help you stay within your budget.

5. Consider leasing instead of buying. Leasing a vehicle allows you to use your vehicle for an arranged duration of time and a predetermined number of miles. You won't own your car, but lease payments are typically lower than what the monthly payments on a loan would be for the exact same vehicle. Some lease terms also give you the option of purchasing your vehicle at the end of the leasing period. Before you decide to lease, it may be helpful to consider.

the lease costs at the beginning, middle, and end of the leasing period.

what leasing offers and terms are available to you.

how long you want to keep the automobile.

Method 2 Refinancing an Existing Loan.

1. Contact your lender. You can apply to refinance your automobile loan with the lender from the original loan, or you can switch to a new lender. Lenders who allow refinancing will replace your existing loan with a new loan, typically offering lower monthly finance charges. Not every lender will allow borrowers to refinance a loan, so it may be worth comparing your options to determine which lender to go with, or whether you're eligible to refinance at all.

2. Gather the necessary information. As part of the refinancing application process, you'll need some basic information to provide the lender. Before you apply to refinance your loan, you'll need to have ready:

your current interest rate.

how much money is still owed on the existing loan.

how many months remain in the existing loan's terms.

the make, model, and current odometer reading of your vehicle.

the current value of your vehicle.

your current income and employment history.

your current credit score.

3. Compare refinance loan options. If you are eligible for an automobile loan refinance with your existing lender, you may be eligible for a better loan through a different lending institution. It's worth comparing your refinance loan options to get the best available loan terms. When you search around and compare refinance options, it's worth considering:

the loan rate.

the duration of the loan.

whether there are pre-payment penalties or late payment penalties.

any fees or finance charges.

what (if any) the conditions for automobile repossession are with a given lender.

Method 3 Pre-paying an Existing Loan.

1. Learn whether you're able to pre-pay your loan. If refinancing isn't an option, you may be eligible for pre-paying your loan. Pre-payment, also called early loan payoff, simply means that you pay off your debt before the agreed-upon end date of an existing loan.[29] The benefit of pre-paying your loan is that you're not subjected to the monthly finance charges you would otherwise be paying on your loan, but for that reason many lenders charge a pre-payment penalty or fee.[30] The terms of your existing loan should specify whether there is any pre-payment or early loan payoff penalty, but if you're unsure you can always consult with your lender.

2. Learn the pre-payment process for your lender. If your lender permits you to make pre-payments on your loan, there may be a special process for making those payments. These payments are sometimes referred to as principal-only payments, and it's important to specify to your lender that you intend for that payment to be applied to the principal loan, not the finance charges for upcoming months. Each lender's process may be different, so it's best to call or email the lender's customer service department and ask what you need to do to make a principal-only payment towards your loan.

3. Calculate your early loan payoff amount. There are many early loan payoff "calculators" available online, but all of them factor in the same basic information to determine how much you will need to pay in order to payoff your loan early:

the total number of months in your existing loan term.

the number of months remaining on your existing loan.

the amount your existing loan was for.

the monthly payments remaining on your loan.

the current annual interest rate (APR) on your existing loan.

Tips.

Reducing the finance charges by reducing the term of the loan will lower the finance charges overall but it will also increase your monthly payment, because you take less time to repay the loan.

Consider working with a credit counseling organization if you're having trouble sticking with your budget or paying off your loans.

November 26, 2019