Business Owner Beware: Know Your Numbers
I was recently asked why did I make the decision to roll out a course regarding finance options for business owners. The answer is simple. From working in the industry as an independent broker and advising business owners with options for funding their business, I have found that although terms may be clearly defined by possible lenders, the terms themselves are misunderstood to most business owners.
In my opinion, this is a product of two things:
1. Predatory lending and sales tactics
Now, I will say that I have friends still in the industry and I have heard them clearly explain terms, implications, and expectations responsibly to their clients so I will not say that ALL lenders are predatory. That is simply not true.
On the other hand, I will place some of the responsibility on the business owner. Let’s say these terms are explained clearly. Are you 100% comfortable in their definitions of these key terms? Are you aware of the multiple options you have or do you feel backed into a corner making a decision?
The following is a great example written by Jason Fleming at dealstruck.com. I will place key terms in bold lettering in the following example.
“Merchant cash loans are often priced with a buy rate between 1.2 and 1.4. To determine the total payback amount on the loan, the buy rate is multiplied by the amount borrowed. In a case where a borrower obtains a $100,000 loan with a 1.3 buy rate for a 12-month term, his total payback amount is $130,000. At first glance, that seems like a 30% interest rate, a rate that most would consider high. And indeed, the interest cost of the loan is 30% ($30,000). However, when loans are priced using a buy rate, all of the interest is charged to the principal upon origination of the loan. If the loan had been priced at 30% APR, where interest accrues on a lesser and lesser principal amount as payments are made, the total payback amount would be approximately $117,000—a difference of $13,000! The 1.3 buy rate is actually equivalent to a 52% APR, not the 30% one might expect.
Another important consideration when evaluating a buy rate is the importance of time. Buy rates are not annualized as APRs are (hence, the word annualized). Suppose the $100,000 loan with a 1.3 buy rate had a term of 6 months instead of 12 months, as is often the case with merchant cash loans. Instead of paying back $130,000 over the course of a year, the loan is paid back twice as quickly (in 6 months). The equivalent APR is now 104% (52% * 2)!”
Do you see how hearing the word “rate” can be confusing now? Does a 1.2 “rate” sound like a good deal? Would you know to question which “rate” you are negotiating or being presented? Would you be comfortable doing the math or even asking the broker to do the math for you with confidence?
This example is why courses for business owners in the area of finance must become more accessible and business owners must take advantage of them. As a business owner looking for funding, we may get sucked in with the 1.2 “rate” because all we hear is the 1.2, not the key definition or explanation of our “rate.” Owners must also be comfortable enough with their knowledge base to keep calling and negotiating for better terms based on their business strengths.
This article is not here to discourage a business owner for borrowing money for their business needs. I would only ask that owners take the time to gain additional knowledge, know their options, and know their numbers in order negotiate from a position of power and clarity.
To learn more, please check out “Business Funding 101.” A course specifically for business owners to increase their knowledge base in the area of business financing and credit.
Also published on www.insideexecutive247.com
About the author:
Noah Carmichael is an Executive Coach and Director of Inside Executive. Noah works with business owners, executives, and their teams on a one-on-one or group basis in areas ranging from personal and professional development to operational strategy and sales accountability training.
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