Tag Archives for " cost of business financing "

Assessing The Cost Of Money

Business Financing
/ By Brent Finlay

“How Much Should You Be Prepared
To Pay For Business Financing?”

As a business financing consultant, my role in helping business owners and managers locate and secure business financing is to focus in on what are both the most 1) relevant and 2) attainable sources of capital available to them in the time they have to work with.

The cost of money is always going to be relevant to risk and supply for any business at any time.

Which basically means that the money (and its related cost) that can be available for what you want to do today can be very different to what may be available in the future or what was available in the past.

I bring this up because of the confusion that constantly gets created by different providers of capital, each living in their own corner of the market, explaining to business owners what cost of money they should or should not be paying.

One of the worst offenders of what I will call “cost of money confusion” are the major banks or “A” lenders who believe that if you can’t qualify for their low risk, low cost funding, that you shouldn’t be in business at all.

Worse yet is when they draw in business owners or business managers that are easily “on the bubble” at best in terms of qualifying for Big Bank financing, only to either provide a less than adequate financing facility or none at all.

This speaks to what is truly relevant to a business owner with a particular financing request. If you have lots of time, like 2 to 6 months or more, and want to apply with a lower cost lender, then that may very well be the best approach to take.

But if you're under any type of time constraint where you’re trying to close a transaction, have an opportunity to expand sales, or need capital for some purpose where failure to do so by some time will either incur incremental operating costs, or cause you to have an opportunity cost incurred, then part of the criteria for considering different money suppliers involves determining when the cost of money is less than or equal to the cost of the opportunity, transaction, or operating cost?

Because business financing can be difficult to secure at times, especially when you’re talking about larger amounts, sometimes the cheapest form of money is not the best target, even if you can qualify for it.

Relevance and availability is about zeroing in on the best likely money supply source at a given moment for a given purpose. Business Financing, regardless of cost, is not a one size fits all proposition.

Too often, business owners will spend months and sometimes years searching for the cheapest source of money because they have been brainwashed to believe its the only thing that’s relevant to them. To be clear, cost of money is extremely relevant, but its also not the only consideration.

In the mean time, while they are looking and searching, they are likely forgoing some opportunity that could have been making them money…potentially far in excess of any incremental cost of capital they may have had to incur to get business financing in place sooner.

Don’t get me wrong…I’m all for low cost financing. The more of it the better ... provided it properly fits into the intended application.

But…and its a BIG but…the circumstances and timing have to be right to go after it, otherwise opportunity cost out weighs the 1) the time it takes to secure the best rates in the market, and 2) the restrictive conditions and covenants that can accompany lower cost financing.

If you can’t operate on anything other than the cheapest forms of money available, then so be it. That will be a limiting factor going forward for sure.

The most cost effective sources of money that exist at any given point of time, are the financing options you can secure (with terms and conditions that you are prepared to accept) and get funded in the time you have to work with… where the cost of capital is going to be less than or equal to the incremental economic return you expect to generate from investing more money in your business.

The notion that you should only consider money sources that fall into a certain snack bracket when it comes to cost is highly limiting.

A good business owner/manager understands this and utilizes sources of capital that allow him/her to take advantage of opportunities that can make a profit.

Sometimes, the net margin will be more and sometimes it will be less.

But without incremental capital, the margin available is zero, regardless of the cost of money.

Click Here To Speak With Business Financing Specialist Brent Finlay

Cost Of Locating Business Capital

Business Financing
/ By Brent Finlay

“What Is The Cost Of Locating And Securing Business Capital?”

Depending on who you’re talking to, there will be those that claim there is no cost to them to acquire business capital and to others the costs is considerable.

I say that there is always a cost to find, arrange, and secure business financing.

Always.

On the no cost side of the argument, people with “A” credit who have always been able to get the financing they need through an institutional lender would claim that they never had to pay anything to locate or arrange the financing nor should they. For these individuals, I say good for you. But there is a cost of time, and business financing these days is tougher to get in place even for those of you with even the best credit and strongest lending profile. And if doing it all yourself gets the best result, that’s great… provided it didn’t take two years to accomplish during which time there could have been a substantial opportunity cost associated with not getting things in place sooner.

To me, biased as I am as a business financing consultant, there is a cost for locating and securing business capital no matter who you are. Even if you go to your bank tomorrow and get financing right away, there is no guarantee that its the best deal available on the market or even the best deal you could have secured with the time you had to work with.

And regardless of whether or not you pay a third party to assist you with the process, looking for business financing is still going to occupy your time and there is a cost to your time.

A better worded question would be how do you minimize the cost of locating business capital and get the largest possible benefit or group of benefits? Avoiding costs trying to understand and do everything yourself, especially in the world of business finance these days, just creates more cost in the long run.

And what’s hard for the average business owner to understand is that the landscape is continually changing so that whatever you thought you understood about finding and securing money for your business a few years ago may no longer be relevant.

It all comes back to how is your time best spent and, all things being equal, will you be able to figure out the best course of action that is actually cheaper for you in the long run compared to what others that work in the market every day may suggest as alternative approaches.

Regardless of what you’re personal belief system is on this subject, remember that there is a cost to this process and many times less investment in the process generates less results.

Click Here to Speak Directly With Business Financing Specialist Brent Finlay

Cost of Capital

Secure Capital
/ By Brent Finlay

“When Is The Cost of Money You Can Borrow, Rent, or Receive As Proceeds Become Too High?”

What the right cost of funds should be for any given deal is always an interesting question to ponder. Business owners will get a certain interest rate or rate of return locked into their mind and won’t settle for anything less. If they have properly gauged the market, this can be a good strategy, provided you have time to beat the bushes for the best deal.

In reality, however, every business financing scenario where a debt lender or investor extend money to a business for some application is a customized solution. No two are the same and at any given point in time there can be radical departures among what is available in the market for otherwise seemingly similar deals.

Sometimes you get lucky and step into a rate that would not typically be available to your business and the desired application of funds. Sometimes you’re not so lucky and its hard to find anything where the cost of funds is what you would consider reasonable.

So what is the right answer in terms of when is the cost of capital too high?

Assuming you have properly approached the market with your financing requirements, the appropriate cost of funds, at a given point in time, is what you cash flow.

If you must have money right now for operations, expansion, survival, etc., then you need to determine if you can cash flow the best available deal in the market. If you can’t, don’t take the dough. And when I say cash flow, I don’t mean come up with a forecast based on some low probability assumptions. If you can’t debt service the financing proposal on a cash flow projection with at least a 70% probability of success, then the cost of money has gotten too high.

No one wants to pay more than they need to at any time. But business financing is very fickle and even more unpredictable, so some times the deal is better than others.

The main objective is to make decisions that will allow you to fight another day versus the alternative.

If you’re too focused on securing a low cost of financing, you could run out of time and blow a good deal. If you take on financing that can’t be cash flowed within reasonable certainty, you may very well have sold the farm.

The point here is don’t get hung up on interest rates or rates of return, get hung up on cash flow and time lines. The longer you stay in business, the more often the cost of money will be in your favor and allow you to bank good returns. Its just not always going be that way, so get used to it and make the best decision today to assure better future opportunities.