Less For More OR More For Less

Obtaining business financing can be somewhat of a daunting task. There are numerous variables that have to be taken into account such as;

• Rates & Terms

• Funding amounts

Many businesses who find themselves on the market for the first time can be overwhelmed by all these factors.

Grasping a thorough understanding of all these variables before taking our financing is crucial to the business’s long-term success.

In this article, we are going to be shedding some light on how to navigate obtaining the best deal and making sure the lender you are working with is a long-term fit for the business.

Rates & Terms

Many businesses who find themselves on the market for the first time are typically fixated on obtaining the best rates and terms. Rates and terms can vary between lenders.

Should I take the highest dollar amount or a lower rate & longer term?

Whilst rates and terms are a priority for most businesses, obtaining the best rates and terms on your first deal can sometimes be a double-edged sword. Numerous businesses have a specific dollar amount they are in need of to plug the gap or expand. Unfortunately, it is very common for businesses to compromise on this specific amount needed in order to secure the best rates and terms. This causes a chain reaction that in the long term ends up causing a business to end up with multiple positions.

In a previous article, we covered “payment history” and why it is crucial in obtaining the best deals.

When applying for the first time without a significant payment history lenders tend NOT to offer the best deal. This means that a lender may offer the most competitive rates, but will compromise on the dollar amount in order to offer these rates. In contrast to this, there are other lenders who will offer the specific dollar amount needed yet not at the best rates and terms.

Business owners are left with the dilemma of “should we take the deal that doesn’t satisfy the dollar amount we need or should we take the deal with lesser terms but satisfies the dollar amount we need

A recent industry study carried out by the Finance Lending Regulatory Committee found that within 8 months 64% of merchants who settled on a lower dollar amount than needed ended up with a minimum of 3 positions.

Let's Put This Into Context

Business A is in need of $500,000.

Business A is new to the market and is fixated on rates & terms yet has no existing payment history.

Lender A offers Business A the $500,000 on a 9-month term and requires the business to be 70% paid in to obtain refinancing.

Lender B offers Business A $200,000 on a 13-month term and requires the business to be 30% paid in for refinancing.

Business A ends up taking Lender B's offer and settling for less money than needed in order to obtain better terms.

3 Months later having not obtained the funding amount needed Business A is on the market for money again to plug the gap that wasn’t filled by Lender A. This second round of funding ends up being a lousy 2nd position offer.

By taking out a 2nd position Lender A who funded

business A will not move forward with a refinance and now Business A is stuck in a cycle of having to pull out multiple positions every 3 months.

Seeing as business A has a history of taking out multiple positions no A tier lenders will touch their file.

Conclusion:

As you can see from the example above it's crucial to secure the funding amount you need. Compromising on this may enable you to get a better rate and term on round 1, however by not settling for what was needed it is inevitable that you will end up on the market again.

As we explained when you end up taking a second position you not only jeopardise the relationship you were trying to establish with the first lender you worked with, but you are guaranteed to end up stuck in a cycle of pulling out numerous positions to maintain payments on the existing positions.