Often the first thing anybody looks at when borrowing business finance is to see what the cost of that finance is. Things like, the interest rate, the fees, the terms etc.
The myth about business finance is that whilst the terms and conditions matter, the cost of the business finance is much less important. Too much emphasis is put on the cost of borrowing, normally at the expense of why you wanted to borrow in the first place.
You see, if you are borrowing for your business then it needs to serve on of the following three purposes;
- It will save you money
- It will make you money
- It will benefit your business in some other way
If none of the above apply then you really need to be questioning why you are borrowing to start with.
Why There is a Business Finance Myth
If I was to open a petrol station and sell all my petrol and diesel at £1 a litre then I would have a queue a mile long. You may question why my fuel was so cheap, but if I could show it was the same quality and did the same thing then I could almost guarantee you would be my customer.
The thing about this is, there are some things where only price matters. So if you could refinance your business loan on the same terms but at a lower cost then there would be few reasons not to do it. If you could refinance several debts and save money, then it would also make sense. In this case the actual cost of the new finance is less important as your business is saving money.
Well, how about you take the same argument but apply it in a more complex scenario.
How about if you could put in a new ordering system, it integrates with your telephones, enables you to track new orders and follow up uncompleted orders. This new system would release a member of staff who you could use in your customer service team. This new ordering system would save your salespeople two hours a day in paperwork and processing, meaning they could see more clients.
If you could do all this then the benefit to your company would be huge, right? So the £50k it would take to do this is being offered to you by a business finance provider.
However, you decide that the cost of the finance is too high. You remember paying less than that a few years ago. Because of the cost you decide not to borrow.
So what was the cost of that finance?
The cost of borrowing your business loan would have been the interest and fees in getting it set up, OK a real cash cost.
The cost of not borrowing would be lower productivity, less return on labour cost, your competitors getting a march on you, lower profit margins and higher overheads.
So where is the balance? The cost of business finance is not just in the interest cost, it has to be balanced against the benefit that borrowing brings. Never look at any business finance in terms of cost alone.
If you are still thinking that the cost of business finance does matter, then catch this short video and see if we can change your mind.
Cost of Business Finance
Let me know your thoughts on this, either add your comments above or contact Lime Consultancy directly through this link.
By Dave Farmer