Know Before You Borrow
Fast Money Can Become Expensive Money
By Bob Dickerson
Executive Director, Birmingham Business Resource Center (BBRC)
I hear the commercials all the time, whether I’m driving and listening to SiriusXM or sitting at home watching television. They promise small business owners fast approval, easy applications and quick access to money. Some even suggest that credit problems aren’t much of a problem at all.
The Appeal — and the Catch
If you own a small business and need money, particularly if a bank has already turned you down, that message can be pretty appealing. But before you say yes, slow down and make sure you understand exactly what you are agreeing to.
Fast money can become very expensive money.
Why Alternative Lenders Exist
I spent years as a banker, and for the past 30 years I have worked with entrepreneurs trying to find the capital they need. I understand the frustration. Banks can be conservative, and even nonprofit and community lenders have requirements that some businesses cannot meet.
That creates an opportunity for alternative lenders. Some provide legitimate and useful financing. Others may provide money at costs and on terms that can leave a business in worse shape than it was before it borrowed.
That is why easy approval should never be confused with a good deal.
Do the Math Before You Sign
Suppose someone offers your business $50,000. Before you get excited about the $50,000, find out how much you are agreeing to give back.
If the agreement requires you to repay $70,000, then the first thing you need to understand is pretty simple. You are getting $50,000 and paying back $70,000. That financing is costing you $20,000, possibly before additional fees.
But cost is only part of the question. You also need to know how quickly you have to repay it and how those payments will affect your business.
When Fast Cash Squeezes Your Cash Flow
Some alternative financing arrangements require payments to be withdrawn from your business bank account weekly or even daily. Meanwhile, you still have payroll, rent, inventory, utilities, insurance, taxes and suppliers to pay.
The $50,000 that gave your business some breathing room can quickly start taking the breath right back out of it.
Questions to Ask Before You Sign
So before you sign, get the answers to a few basic questions.
- How much money will actually be deposited into your account?
- How much will you repay altogether?
- How often will payments be taken?
- How long will you be making those payments?
- And after making them, will your business have enough cash left to operate?
Understand the Terminology
Be particularly careful when you hear terms you don’t understand. For example, if someone offers you $50,000 at a factor rate of 1.4, that is not the same thing as a 1.4 percent interest rate. In simple terms, $50,000 multiplied by 1.4 means you agree to repay $70,000.
Don’t let terminology confuse you. Translate the deal into dollars.
When Fast Financing Makes Sense
There are times when alternative financing makes sense. A business opportunity may require quick access to capital, and traditional financing may not be available when you need it. But you should understand what you are paying for that speed and convenience and whether your business can afford it.
BBRC Is Here Before You Sign
At the Birmingham Business Resource Center, we don’t simply want to help entrepreneurs find money. We want to help them make good decisions about money.
If you have been offered financing and aren’t sure about the terms, bring the proposal to us before you sign. Let’s look at the numbers and make sure the money that is supposed to help your business doesn’t end up hurting it.
Being approved doesn’t necessarily mean you can afford it.
Getting to YES matters. Getting to the right YES matters even more.