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 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