When you’re looking for money for your business, one of the first factors to consider is the cost of the money. Cost certainly plays a role in your final decision and it’s a logical place to start your evaluation, but it shouldn’t be where it ends. It’s important to understand that the rate and terms on paper only tell one side of the story when it comes to cost.
Here are a few factors to consider when you evaluate the true cost of the money coming from a business loan or advance.
Rate vs. Risk
On the surface, a business loan from a bank has a relatively low cost of money, but this is partly made possible by the high risk taken on by you, the borrower, by putting up your most valuable assets as collateral. When taken into consideration, that low cost of money can actually be offset by your increased personal and business risk. By comparison, Small Business Fundz passes on a very low risk to the merchant, because both our Merchant Cash Advance and Business Loan products are unsecured.
Another cost factor to weigh is the actual payment structure of a financing program. How will your cash flow feel the brunt of payments? Our Merchant Cash Advance payment model works with your natural cash flow, so you make smaller payments during weaker sales periods. That way, you won’t feel the doubling effect of a slow month being slammed by a huge payment.
Our Business Loan program also has an automated payment system. As a result, you only have to ensure that a small, manageable balance is in your business bank account each day, instead of planning all month to make sure a much larger sum is available at the end of the month.
While the rate may be higher than a typical business bank loan, your business won’t feel the payments as much as you might think. Every day, you’re getting closer to paying off your debt in small increments. When you have a steady volume of sales (something we look for in every applicant) our payment model will make sense for your business without overburdening your cash flow.
In contrast, a bank loan or a business credit card (another financing option for small business owners) usually has a manual, monthly payment process. It’s up to you to manage that debt and ensure that the correct monthly payment is always made on time. If you miss a single payment, there’s a snowball effect that can not only bury you in serious debt, but severely damage your credit history.
All of these factors are part of a cost analysis. Make sure you look deeper at how the structure of payments could put pressure on your cash flow and hurt your ability to keep growing as a business over the length of the financing term.
Another Cost Comparison
Banks that offer highly-collateralized, government-backed SBA loans can drastically minimize their own risk, while passing on risk to the government and small business owners. As a result, they offer relatively lower rates. That much is true. But what’s also true, is that the majority of business owners who apply for these bank loans are denied approval. So, for the millions of business owners that don’t make the cut, or are turned off by the arduous application process for bank loans, they have to make another cost comparison: one between all of the alternative financing options available to them.
So how does Small Business Fundz compare to other alternative financing providers when it comes to cost and other factors? The cost of our money is very competitive with the rates of other funders and in many cases, is favorable for business owners. Our term lengths and estimated payback periods are also comparable.
With similar pricing models, you may have to look at other factors to choose which alternative finance source is your best option. A good place to start is reputation, history and service; the intangibles that make the difference between a smooth financing relationship and a rocky one.
Small Business Fundz is one of the largest alternative financing providers in the US, serving small businesses nationwide. And more importantly, our 70% merchant renewal rate speaks to the satisfaction of those whose opinion matters most: our customers.