10.10.17 – Calculating The Real Cost Of Business Lending – Part 2
In the previous blog of this series, we looked at how to calculate the cost of business funding, and found some surprising results: Business loans which you have to pay off over a period of years can turn out to be more expensive that they look.
Because most lenders charge fees for setting up and providing a business loan, the best way to compare costs is by getting out your calculator and working out the annualised percentage rate (APR). Some ‘alternative lenders’ offer products that are called “unsecured loans”, which can carry APRs as high as 72%, even though many of them are actually secured by a personal guarantee!
We also saw that another form of business financing, cash flow finance or invoice discounting, actually provides a very clear cost structure. Cash flow financing is actually the sale of a company asset at a discount to the face value. As the discount fee is only payable once the debtor has paid the invoice, you don’t need to calculate ongoing costs. The fee that a company like tim deducts for advancing cash against your invoice isn’t really like a loan at all, and should never be annualised as an APR. You know exactly what fixed fee you will pay, so stick with that.
Your cash flow financing can be structured to be completely free – or better!
Of course, the real point of any cost-comparison exercise is to find out which option is the cheapest and best for your business. The fact is, that also depends on what you do with the money, because if you use debtor finance cannily, it can be free. In fact, a well managed invoice finance system could actually make you money, while vastly improving your cash flow. That’s right, and all because of innovation, technology, changing product design and delivery of funds.
If you are an Australian trading business, the chances are that you pay for your goods and services 30, 60 or 90 days after receipt of an invoice. Maybe you’d like to pay sooner, but because your customers pay late, that’s the best that you can do.
There’s nothing wrong in paying within standard timescales, but your suppliers would love to get paid quicker and many of them are prepared to offer substantial discounts to those that pay promptly, but for many businesses the ability to pay COD eludes them and thus the ability to negotiate real discounts. For any business with a significant turnover, there are considerable extra profits available by accessing these discounts.
Early payment discounts offer an instant profit boost
The theory is that if you use a form of cash flow finance such as invoice discounting or factoring to access your accounts receivable up front, and use some of that money to pay your suppliers early, you can make money from your business lending. In practice, you don’t even need to go through all those steps because tim’s Accelerator Funding Program does it for you.
With no fees or charges, no monthly admin fees, and no property security, Accelerator brings you your cash up front and tim pays your suppliers invoice. The cash flow benefits to you and your supply chain are significant and the net cash flow to your business immediately improves, and you have not used your own capital or pledged security in the form of property to achieve the benefits.
Accelerator is a very innovative and smart business funding solution.
So it turns out you don’t need that calculator after all: no matter how hard you look, you won’t find a business loan that charges a negative APR!