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It’s going to cost how much!!! You must be crazy!!!
That comment is made by entrepreneurs and business owners after hearing how much it costs to borrow money from either a mid market or private lender. The comment is usually followed by a series of expletives that I won’t type here but needless to say the cost of capital is something that can scare or upset someone who maybe hasn’t thought through the opportunity cost (see past blog post here). There is no such thing as free money when it comes to business but more importantly the money your business is using has a cost to it that you may never have thought about but you might want to.
The two largest but silent amounts of money your business uses and pays interest on are: outstanding payables to vendors and outstanding payments due to the government such as tax or payroll remittances. If you pull open any of your invoices from vendors that are not paid and are overdue you may notice a small printed line on the bottom that says something like “Any balance not paid by the due date will be subject to interest at 2% per month”. Maybe it doesn’t say 2% but it certainly doesn’t say no charge. Any government remittances that have not been paid and are overdue are subject to interest rates that often aren’t disclosed and are simply charged. That money should be going to your vendors and the government but is instead may end up being used to run your business and it has a significant cost to it. 2% per month is 24% per year. Even 1% per month is still 12% per year.
Is there an alternative?
When considering using money for your business it is quite reasonable to push back when you hear a lender mention high interest rates. If your business has successful paid all of its bills on time and doesn’t incur interest charges then your business is one of the few. Most businesses end up using the money that should be going to their vendors or the government for operational purposes and don’t realize the interest cost. A business that finds themselves in this position would be best to sit down and figure how much money they need, what they are currently paying for it and are there alternatives such as a term loan or a line of credit that would help them manage their cash flow better. Even if the interest rate seems high you need to sit down and work out the exact math to see if your feelings and emotions match reality. You may be surprised by what you learn.
Every business needs money to operate. Very few businesses have a high enough margin to grow from cash flow and at some point require outside capital in the form or a loan or investment. The real magic for an entrepreneur or business owner to understand is how can the business can use the loan or investment to increase profits – not just survive. This type of thinking requires a mental shift in how you view money. Money should be considered a resource that goes to work and produces an outcome. No different than how you view your staff, your equipment or your marketing budget. You may have heard it said that you need to put your money to work but do you actually know how do to that in your business?
Not sure how to do that? Get in touch with us to have a conversation about what might be possible. Businesses always need money to grow or take advantage of opportunities and we use that need as a starting point for helping you do more. If you want someone to ask you some questions that get you thinking about capital for your business, visit www.mlenow.ca to explore what your business might be able to do.
I created mlenow.ca to help businesses looking for ideas, money and results. Our team gets up every day to help businesses that find themselves in this position. Let’s chat and connect if you (or someone you know) needs some help with their business.