Banking and Loan Arrangements
It is important to remember that banking and loan arrangements vary per banking client. So, if one banking client managed to get a $50,000 worth of loans under a long term tenor of ten years with only a fixed interest rate for five years of 5%, that does not mean that all banking clients would be able to enjoy the same deal by the time they apply for a loan. There are factors and variables which creditors, which in this case would be the banks, have to consider before making banking and loan arrangements.
Credit worthiness and the ability of the loan applicant to pay for the borrowed money in the form of principal with the agreed upon annual interest rates are some of the most important variables that they use when drafting out loan and banking arrangements ; the value of the loan, from the borrowers’ perspective, on the other hand, is often based on the tenor of the loan and the annual interest rate that it would generate as one pays the principal amount owed. Ideally, from the borrowers’ perspective, a loan that has the longest tenor in years that offers the lowest interest rates at the same time would be the best banking and loan arrangement. But then again, that does not always happen and the loan tenor and annual interest rate generated during the loan and negotiation process would almost always depend on the bank’s assessment on the likelihood that the total amount that would be owed would be paid with interest. The higher the likelihood is, the more flexible the bank would be when it comes to setting the loan tenor and interest rates and ultimately, the lower the cost of debt the company would have to shoulder. Below is a sample loan computation for a $50,000 loan for a startup firm at current market rates.
Tax Collection and Payments
Income taxes would be the most important form of tax that would most likely be collected from businesses. In this case, the business is in the form of a partnership and the level of income tax that would be imposed on other types of small business would most likely remain unchanged. Aside from income taxes, value added taxes (VAT) is another form of tax that would have to be paid. The good thing about these two taxes is that they are automatically imposed on and collected from the business after every successful sale of an item or a service bundle. Additionally, a huge chunk of the value added taxes gets transmitted to the customers—meaning they are the ones that are paying for it. So, for every purchase or sales transaction, VAT already gets covered. All in all, this means that there is no reason for the company to miss any filing of tax payments.
Pricing, Commissions, Discounts, Markups and Markdowns
Pricing of products and or services being offered is more strategic than regulatory. Businesses have the freedom to create their own pricing strategy. In this case, what we are dealing with is a startup firm with its capital financed from a bank loan. So, the pricing strategy must be aggressive because the company would have to be able to generate a sales profit large enough to cover all the debts, liabilities, and expenses of the company. This also means that the company has to be able to cover all its debt payments for a certain period before it can experience a net positive cash flow. This can be a real challenge for a startup firm with no stable market base. In that case, lowering the prices, and increasing the commissions, discounts, and putting the products and or services on a markdown status would be a good first step. As time passes, a certain percentage of the population would find a need for the products and services being offered. After which, the company can already raise or at least normalize the prices. That would most likely be the time where the company can experience large increases in profits
Assets and Inventories
Assuming that computers and product inventories would be the first assets that the company would have, the most probably way how they could be acquired would be by actually purchasing them using the capital raised from debt (i.e. bank) financing. Because no other form of financing has been mentioned, it would be safe to assume that all assets and inventories would be purchased using loaned money, 100% of it.
Technology and Internet
Technology and the internet can be a startup business’ best friend. This is because there are a lot of technology and internet-based marketing strategies that can lead to huge savings for a startup firm. Establishing a dedicated website and managing an official social media account, for example, enables startup firms to reach to millions of people for minimal to almost no costs at all. For startup firms that are involved in buying and selling of products, establishing an e-commerce website that can cater to sales and purchase transactions can be a good idea as it is more cost effective than an actual brick and mortar store. That way, the company can focus more on paying its bank loans and debts earlier than its due date.
Issues and Risks Involved
The company that is the subject of this paper faces a huge credit risk. This is because 100% of its capital has been sourced out from a bank loan. A bank loan is a debt instrument. This means that the company would have to pay for the amount it borrowed plus interest rates regardless whether the company made money or not from its operations. This is a startup firm so the first year would most likely be not so profitable. This is why the company faces a high level of credit risk—it has to pay for its debt obligations regardless whether it makes money or not.
References
Gartenstein, D. (2015). Small Business Loan Problems. Chron Small Business Hearst Newspapers.
