Why paying more for borrowing can cost you less
There is a belief among many borrowers that the cost of borrowing should be the primary decision tool when it comes to which lender to use. Whilst price is always a consideration, borrowers do look for other factors such as speed of decision, time to draw down and the conditions that are attached to the borrowing.
What is often missed is that fact that paying more for your commercial borrowing can actually cost you less.
Let me explain.
The balance question
Many companies are run by a small board of directors. When it comes to borrowing for the business there are a few main options the business has. The primary option remains the bank. When it comes to bank lending then most exposures over £50k will require a property to be given as security.
For the business, this changes the status quo among the directors. The level of personal property, the value of equity and individual risk varies. At least one director is going to be taking a bigger risk than the others yet their shareholding and access to dividends remains the same. The status quo that has worked for so long is suddenly changed.
A board of directors that works in harmony and pulls together will generate a higher return for the company. The opposite is equally true.
The difference in cost between standard secured bank borrowing and unsecured borrowing can be negligible. The benefit of not upsetting the status quo can be immeasurable but is often not considered when sourcing commercial borrowing.
Internal effort & cost
Many businesses will source finance without considering the time and distraction it can bring. For a lender, asking for the latest financial accounts, year to date figures, various statements and accounting information can seem a standard thing to ask. For the borrower, it can be a distraction, especially if the information being requested is over and above what they currently produce.
How much staff time does it take to get this information together, how does it impact your accountancy costs, how much board time does it eat into.
Time taken to put the information together for a lender is often far greater than initially thought. Whilst it can be an essential task it needs to be remembered that each hour taken is an hour away for the core business activity and makes the business an hour less productive.
The simplest finance option can be most beneficial. If you can apply, agree and draw the finance within a few days then why take the marginally cheaper option that requires hours of your time and takes months?
I fully believe that the price of lending needs to be sensible and acceptable to the borrower, my point is that price is often thought of as the top priority whereas in reality, the real priority is to secure the funding, use it and get on with what you wanted the money for to begin with.
By Dave Farmer
