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How much money can you borrow? Some emergencies are so bad that even the most careful business owners can't handle the costs themselves. So, when saving for an emergency, you should also consider how much you could borrow. You can figure this out by looking at your credit score, how much working capital you usually have on hand, and your ability to put up collateral. Instead of only using your own money, it would be better for your finances to borrow at least some of the money you need to add to your emergency fund. What is the Cost of Debt? The cost of debt refers to the interest the borrower pays over the loan's full term. Unlike other formulas used to measure the cost of business loans, the cost of debt accounts for tax deductions on interest payments. Business owners often calculate the cost of debt primarily to compare it to their projected income growth after receiving additional capital. Therefore, this number can determine if the amount of money you'd owe outweighs the loan's financial benefits. Showing that an option will make more money than it costs can also show how the loan can be used to make more money. For many business owners, finding the loan with the lowest interest rate is the best way to choose the right one. But the meaning of "low" depends on what the loan is for. For instance, one bank might give you the exact amount you asked for but not at the interest rate you expected. But then you remember that this much money will probably bring you three times as many customers. So even though the loan has a low-interest rate, the benefits still outweigh the cost. Financial institutions can also decide what to do based on how the cost of debt compares to what you have planned. For example, they might look at your business plan and decide that the purpose of the loan is not likely to make enough money to pay it back. How do you figure out how much debt costs? Different financial experts use different ways to figure out how much debt costs. The most common are: Cost of debt = cost of interest (1 – Tax Rate) As you can see, there are only two numbers in the formula: the interest cost and the tax rate. Because each number isn't precise, this equation, which seems simple, is much harder than it looks. Different banks show and advertise how much they charge for interest differently. One institution might tell you the annual percentage rate (APR), while another might tell you the total amount you have to pay back. The tax rate is the average tax rate on your business's income, including federal, state, and local taxes. You need help finding this number on your tax return from last year, partly because the new tax laws may have changed your tax bracket. Your accountant's job is to know your average income tax rate. But if you want to figure it out yourself, divide your total tax liability (how much you owe each year) by your total taxable income. "Interest expense" means the total amount of interest paid on a loan over its life. This includes all loan fees that you can claim as a tax deduction. Unfortunately, most places won't tell you how much you'll pay in total interest, so you'll have to ask. In theory, you should do this for each business loan you consider. Now that you have the two parts of the formula, you can figure out the cost of debt. How about costs? Most loans for businesses come with several fees. This can include fees for starting a loan, getting documents ready, processing, running a credit check, etc. To get an actual cost of debt, you need to consider fees that aren't tax-deductible. Instead of adding them to your interest costs, you can add them to the total. But remember that this only works for fees that are not tax-deductible. You wouldn't include tax-deductible fees because you don't have to pay them. It can be hard to figure out which fees you can deduct and which you can't, so you should talk to your accountant before making any assumptions. For example, borrowers can usually deduct "application" or "loan origination" fees, but they can't deduct "packaging" fees. How to bring down the cost of your debt: You should only look for business loans if your company can handle this much debt. In other words, you must first figure out if you're ready to take on more debt. Then, you can determine what kinds of loans you can get and how much they will cost you. But if you do some math, you might conclude that neither choice is a good deal. In this case, you should work on lowering the cost of your debt. But, of course, this only sometimes means you should stop looking. Here's how to make your next business loan less expensive: 1. Lower your rate of interest 2. Get another loan. 3. Make it more likely that sales will grow 4. Look for terms with less time. When is it good for a business to pay off a loan early? It's more challenging than you think to decide whether or not to pay off a business loan early. There could be penalties for paying off the loan early or damage to your credit score. You might need more time to be able to pay off the loan. So, before you go this route, you should make sure that paying early is the best thing you can do now. Here are some things to think about before making a choice: 1. What are the loan's terms? 2. Are there fees if I pay off my loan early? 3. Will early payment save me money? 4. Will paying early hurt a business's credit? 5. Will it be hard for me to get more loans? 6. Is there anything else I can do besides pay early? 7. How will paying early affect tax deductions? 8. How much would I have to pay in reality?