Assessing The Cost Of Money
“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 is both 1) relevant and 2) attainable 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 little myopic world at times, 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 business owners or business managers in 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 6 months or more, and want to take a flier at lower cost forms of money that you are likely not going to qualify for, then you may want to consider giving it a shot.
If you are 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 is when is the cost of money less than or equal to the cost of the opportunity, transaction, or operating cost?
Because business financing can be difficult to secure most of the time, 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 best likely money supply source at a given moment for a given purpose.
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.
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 super cheap money.
But…and its a big but…the circumstances and timing have to be right to go after it.
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 source of money that exists at any given point of time, is the money 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 whimsical.
A good business man understands this and utilizes sources of capital that allow him to take advantage of opportunities and make a profit.
Sometimes, the net margin will be more and sometimes it will be less.
But without incremental capital, the margin is zero, regardless of the cost of money.