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Skills / Working / Evaluate a business loan offer

Working Money skill

Evaluate a business loan offer

Evaluate a business loan offer by modeling proceeds, fees, repayment cash flows, collateral, covenants, guarantees, and downside cases.

Compare the complete obligation and its operating constraints, not just the advertised rate.

When to use

  • Use for term loans, credit lines, revenue-based financing, equipment finance, or refinancing proposals.
  • Do not provide legal or tax approval; require qualified review for binding documents and jurisdiction-specific consequences.

Preconditions

  • Obtain the complete term sheet, fee schedule, amortization terms, security documents, covenants, and current official lender disclosures.
  • Confirm borrowing entity, currency, use of funds, expected draw date, and authorized decision makers.

Procedure

  1. Record gross facility, expected draw, withheld fees, required deposits, and net usable proceeds.
  2. Model interest basis, reference rate, margin, compounding, payment frequency, amortization, maturity, and balloon amount.
  3. Include origination, legal, commitment, unused-line, monitoring, exit, prepayment, late, and default costs.
  4. Calculate payment schedule, total cash cost, effective rate or comparable annual cost, and remaining principal over time.
  5. Document collateral, liens, personal guarantees, reporting duties, covenants, cross-defaults, and lender control rights.
  6. Test base, rate-increase, revenue-decline, delayed-collection, and early-repayment cases against cash flow and covenant headroom.
  7. Compare offers on identical proceeds, dates, horizons, and scenarios.
  8. Record negotiable terms, unanswered questions, professional advice, and approvals.
  9. Verify final documents against the approved comparison before signing.

Worked example

Offer A advertises 8% interest while Offer B advertises 9%. The model shows that A withholds a large fee, requires a compensating balance, and has a balloon payment. B amortizes fully and permits prepayment without penalty. The decision report compares cash cost and covenant headroom under the same downside case, then sends the documents for legal and tax review.

Related skills

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