It’s sad but true that too many businesses are struggling forward with too little funding for their ambitions. Whether it is staying in cramped or unsuitable property, struggling with cash flow as customers are too slow to pay their invoices, lacking the necessary equipment or failing to properly staff up, the consequences of under-funding do damage to both the short and long term prospects of any enterprise.
And despite historically low interest rates, all too many businesspeople I talk to say that where they do have access to loans they are just too expensive to consider. How wrong they are.
The problem is two-fold. Firstly, following the financial crisis, big financial institutions have become highly risk averse and impose far too stringent terms – and I mean the collateral & covenants here, not the cost – and deny perfectly sound enterprises the cash they need to thrive.
Secondly, too many businesses look at loans down the wrong end of the telescope. The cost is only half the equation here. If you are buying something for £100 and selling it for £200 then even if finance costs £50 then it’s a good deal. That is profit you would not make without the loan – plain and simple.
It can be hard to persuade entrepreneurs of this. Most businesses are ‘bootstrapped’ into existence without loans. It takes a gritty, self-reliant personality to start a business but the trait that made the business fly can also hold it back because of a reluctance to reach out for help in growing. Thinking about a business loan is in fact often the first sign that a firm is maturing from start-up phase to being a serious growth company.
The message I bang home is that the correct way to look at the cost of a loan is not the absolutes in terms of fees and interest but in what it delivers for your business.
And that means being realistic about what your options are. Getting a business loan involves a lot of different trade-offs and options. And that means that even the ‘lowest cost’ loan may not be what it seems.
For example, banks will commonly charge a wide range of additional fees on top of the raw repayment rate. There’s an arrangement fee – which can be up to 10 per cent of the principal. There’s fees for property surveys or accountancy audits – which can often be imposed quarterly.
Where the loan is for invoice financing – a common method of managing your business cash flow – other fees also appear. There’s a take on fee for each invoice that gets financed and frequently and additional ‘trust account’ fee which is levied each time a transfer is made into the lender’s account.
I always try and get my customers and the businesses I advise to look at the total cost of the loan over its lifetime but then – and here’s the important bit – assess what they will be able to do with the loan that they cannot do now. Once they understand the net gain then spending months chasing the ‘cheapest’ funds suddenly doesn’t look so very clever.
So, before you reject ‘too costly’ finance, sit down and have a think – what is your business going to miss out because of your inability to see the good in a deal because of the price?