What is the cost of commercial finance? The most common answer surrounds interest rate and fees, which is a fair answer.
If we were to say that the cost of commercial finance can actually become an income, or negative cost, then it starts to raise eyebrows.
The theory is that you only borrow because there is a benefit to your business. Any commercial finance you agree to should achieve one of the following, if it doesn’t then ask yourself why you are borrowing;
- You save money
- You make more profit
- Your business benefits in some other way
Why The Cost of Commercial Finance Doesn’t Matter
So you have borrowed £30k to consolidate several other loans. You are now paying £2k less per month than you were before. Great, but what is the benefit? You need to put this £2k surplus to work, this could be marketing, new products, paying suppliers early etc.
The question is, what is the financial benefit to having this extra £2k each month?
The chances are you will be making more profit somewhere as a result. With this in mind the cost of your borrowing becomes a cost of those goods sold.
In reality, the cost of commercial finance does matter. Saying it doesn’t makes a point, but the truth is it simply matters much less than you think it does.
The moral here, if there is one, is to consider the benefit of borrowing before you look at the cost. The risk of looking at the cost of borrowing first is that you will miss the opportunity that comes from having the commercial finance. It is a sort of biting your nose off to spite your face.
The Video Version
If you are still unconvinced that the cost of commercial finance doesn’t matter, then have a look at this 60 second video. Sometimes the point comes across easier on film than it does in text.
Have a watch and see what you think;
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