They say that Cash Flow is KING. And “they” are right. For a business there is net profit and cash flow…everything else falls at least a tier below that in terms of what’s most important. The problem is that sometimes we forget cash flow when we go to borrow money. I had a client who recently wanted $100,000. He had good credit and when offered a loan for $100,000 he initially turned it down for one reason: the 15.99% rate was too high. Most of what we do at LenCred are working capital lines of credit but this offer was for an actual loan that would be paid back over 4 years.
I did not want my client to take something he didn’t want but I also didn’t want him to miss the forest for the trees. In our conversations he had told me what he planned to do with that $100,000. He told me he could “probably” turn that money into $200,000 but he could “definitely” turn it into $150,000 in the first year alone.
I did know that our lender would have dropped the rate down to the 12-13% range if he wanted to pay off his loan in 2 years rather than 4. This is where we have to remember that interest rate isn’t the most important factor in obtaining your business financing. Cash flow is. Would you rather pay back $100,000 over 4 years with a payment of approx. $2,800 per month or would you rather lower the rate 3 points and have a payment of $4,800 per month? We even had a 5 year option on the table with a higher rate that offered a payment of $2,512 per month.
Let me say it like this. Rates are ALWAYS important but they are almost never the MOST important factor for business financing. Cash flow is. So while you always want to know the interest rate you also want to obtain what we call “cash flow friendly” financing. Remember, with this example of the client borrowing $100,000 I’m not the lender so LenCred does not make more money on any of these options. The lender pays us the same brokerage fee no matter what loan terms are selected by the borrower. That’s good because it puts us in a position where we’re not influenced one way or the other and we can solely position ourselves to advise the client to do what’s best for him or her.
The reality is that there are VERY FEW businesses where cash flow is not an issue and the money flows like milk and honey did in Moses’ vision of Israel. That’s just not normal so when you get your business financing be sure to think like that. We have a free eBook about “The 6 Benefits of Borrowing the RIGHT Way” and lower rates (what we refer to as minimizing your interest expenses) is “one of six” of those benefits. They should be understood in context. Whether you’re a new business or an established business don’t make the mistake of only evaluating the interest rate. Weigh the rate or cost of your loan offer along with the other 5 benefits, your cash flow, and what you can do with the money you’re borrowing. If you’re like my client and you’ll make $50,000 to $100,000 just in the first year then you can easily afford to pay a rate that might be a little higher than the rate that you might brag about at the next cocktail party.
If you would like to see if you could borrow some money to grow your business feel free to apply now with us or simply contact us if you have questions first.
Additional Thought: It’s also interesting that the 4 year repayment option that was originally denied would only require that $34,116 be paid back in the first year. There would be a total payback of $136,464 over the life of the loan. That means there’s a total cost of less than $37,000 for the money borrowed, about $34k would be paid back in year 1, and he’s projecting a range of $150-200k in revenue generation in year 1 from the $100k loan. Then think of what he could do with that extra revenue from year 1 alone…he could possibly get $200,000 to $400,000 of additional revenue over 4 years from that $100,000 he borrowed – and that’s without applying the concept of compound interest.