We provide money to small business owners for many different reasons. While the purpose of funding needs differ, one similarity is a desire for “low cost money”. As a self proclaimed “cheap skate”, this seems like a logical starting point, but I have considered this position over the years and my thoughts have developed.
The objective of “low cost money” is not to pay more than necessary and that is where we should begin our analysis. The comparison point for most is whatever the bank charges for money, usually prime plus two or three points. For reasons we will discuss, this is not a logical barometer at all.
When we look at a traditional bank, their primary responsibility is to accept minimal risk when making a loan (to protect their shareholders). They do this by saying “NO” to most business loans and when they actually do make a loan, they require personal loan guarantees, over 100% collateral and income/debt ratios that are not practical for most business owners.
Why? Because they work on such narrow margins, they can never afford to make a mistake and therefore shift 100% of the risk in their business loan to you, the borrower – business owner. In their environment, they can only make safe, secure loans because they are not paid enough to accept more risk.
By creating an open marketplace with multiple small business funding companies, we often create an environment where you, the business owner, decides which form of business funding is best and what cost is appropriate for your business.
A couple months ago a client with below average personal credit needed funding to purchase another truck for his business, and he wanted the loan to be in the name of his company, without any personal guarantee (we do this all the time).
His initial Paydex Score was not above 75 as many of our lenders require, but one lender was willing to fund his truck at prime plus ten. We almost did not present the offer to him because we were confident we could help him raise his Paydex Score and get an offer (or two) at prime plus three or four.
“Waiting will cost me too much money – I need the truck and I need it tomorrow” was his reply. His response helped me realize that business owners are more qualified to determine the best price for their funding, not me and certainly not a bank.
Another client in Arizona needed funding to purchase two full containers of tires from China. He spent months locating every bank in town that would not loan him money before he found us. His only other alternative was a “business friend” who would provide the funds in exchange for 20% equity in his company! While his investors wanted a part of his company, our funding company just wanted “more” money (as compared to a bank).
An auto dealer in Colorado agreed our money was much less expensive that giving 33% of his profits on every auto carrier to a “friendly investor”. A restaurant owner in Ohio accepted funding to expand her banquet facilities and their sales boomed. Our money ultimately cost them less than 15% of new profits over six months.
A florist in California used our funding to bridge a slow period rather than permanently lose a campus location where he was two months behind his rent. Spending “more” in the short term was more appealing than losing 40% of his sales over the long term.
These examples and the dozens of others each month confirm that YOU, the business owner, are the best judge of the appropriate cost of funds. In most situations, cost is not the key; access to capital is the key. Given that, a smart business owner who knows their business well is the most qualified to determine how well priced the money is. Not by the cost of funds, but by the opportunity it creates for future growth and profits.
