When comparing the costs of anything for your business, including the cost of finance, you will be most successful and make the best decision if the items you choose to compare to each other are, in fact, appropriate comparisons. Sounds simple and somewhat obvious, and in most cases, business owners choose appropriate comparisons and make strong decisions. I say in most cases because in my experience, the one place that business owners consistently fail to apply this simple idea is when it comes to money – specifically the cost of money for the business (aka the cost of finance).
What does money cost? Generally speaking, the cost of money varies in direct relation to the amount of risk as follows: Higher risk = higher cost of money; Lower risk = lower cost of money. Now this is not a piece about what the cost of money ought to be – some say ‘lower’ and some say ‘higher’; rather, this is a piece about choosing appropriate comparisons when seeking financing for your business. Choosing appropriate comparisons will help you stop wasting at least hours, if not days, weeks and months of toil as you search for a deal that simply isn’t there to be found.
There are many sources of financing for businesses but I won’t detail them all here because what is critical to keep in mind is this: the person who gets to assess the risk of any business is the person with the money, not the person seeking the money. The real-world implication of this critical reality is that your business will not qualify for financing from every source out there. That may sound a tad harsh, but what it means to you as the business owner is that not all sources of financing are appropriate comparisons. If you don’t qualify for funding from a given source of financing, then it is not an appropriate comparison to use in your decision-making process.
I’m often told by business owners that their lawyer, accountant, advisor, friend, etc. has told them that a given source of financing is too expensive, it costs too much, that they would never pay that much, etc. What I’m never (and I mean never) told is that those same people then step forward and offer the business owner financing themselves. If the words a person says after ‘that costs too much’ are anything other than “I am comfortable with the risks you and your business present and I am willing to offer you the financing you are seeking at the rate you want to pay”, then recognize the value of their words for what they are: free advice. The business owners I have seen waste hours and hours seeking a better deal have almost always received this free advice from trusted sources and it is unfortunate because there are times when the pursuit of a better rate has taken so long that the company failed to succeed.
Recognize that this piece is not a veiled defence of factoring or alternative financing rates (typically between 2-4% per month once all fees, sliding rates and surcharges are included). Rather, it is a call to the business owners out there who are searching for financing for their business to better understand that not every business qualifies for every kind of money, and that their time would likely be far better spent working in or on their business.
Comparing whatever offer you have in front of you to a rate that you don’t qualify for (e.g. bank rates) is not going to put you further ahead. It wastes your time and, in fact, dramatically reduces your credibility with whoever made you the offer and whoever you turn to next for financing. Few business owners would walk into a Porsche dealership and complain to the salesperson that all the cars cost more than a Hyundai Sonata (nothing wrong with a Sonata), but many do the equivalent by using inappropriate comparisons when judging the cost of finance. You might laugh at the thought of complaining about the relative price of a Porsche, but this does lead us into the real core of the discussion on the cost of finance: ultimately, the cost of finance has to be judged by the value it provides to a business. More on that next time.