Evaluating Financing Options for Your Business: Myths and Facts (Part 2)

March 13, 2014 | By | Reply More

financing options

Read Part 1: Evaluating Financing Options for Your Business: Myths and Facts

Financial Myth No. 6:
All finance companies charge interest on 100% of the face value of the invoices you sell to them.

FINANCIAL FACT: Some finance companies base their charges only on actual amount of money you receive. There is a large range of pricing in the commercial finance business. Although competition tends to hold prices down, different industries may be charged more because of historical risk. For instance, medical and construction accounts receivable financing will be more costly than commercial financing for a staffing agency.

At one extreme, some commercial finance companies require that 100% of invoices be sold and interest is charged on 100% of the invoices. This may be reasonable because the business is high risk and if your company goes bankrupt, the commercial finance company cannot collect any of the funds that have been advanced.

The best pricing available is computed with regard to the actual funds advanced with interest payable on a daily basis for the period the funds are utilized. This is called per diem interest. Most banks and some commercial finance companies offer this option which may be described as a “line of credit” or “asset based financing” for larger transactions.

Assume a commercial finance company charges a 3% monthly fee and you sell an invoice for $100.00. Assume further that you customer pays in 5 days. Here is a range of costs you would pay, based on various minimum contract time and payment terms:

Based on 100% of the invoice:

59 day minimum term = $6.00 cost 30 day minimum term = $3.00 cost 15 day minimum term = $1.50 cost 10 day minimum term = $1.00 cost Per Diem interest 5 days = $ .41 cost

Based on an 80% advance Per Diem for 5 days = $ .33

“Leave no stone unturned” If you look everywhere to find something, or try everything to achieve something, you leave no stone unturned. “Game Plan” A game plan is a good strategy

Financial Myth No. 7
A finance company contract with no term is better than a contract with a one year term.

FINANCIAL FACT: If you will need financing for one year and rates and terms are lower, the one year contract may be a better choice. “Keeping your options open” If someone is keeping their options open, they are not going to restrict themselves or rule out any possible course of action.

Financial Myth No. 8
SBA business loans are similar at every bank.

FINANCIAL FACT: Some banks originate SBA business loans with delegated authority. This allows additional financing for purchase order, accounts receivable and inventory from third party lenders creating more capital for growth.

“Put all your eggs in one basket” – If you put all your eggs in one basket, you risk everything on a single opportunity, which, like eggs breaking, could go wrong.

Financial Myth No. 9
All finance company contracts, terms, and conditions are similar.

FINANCIAL FACT: Terms range from fair to onerous. When you factor invoices you entrust all your cash flow to a commercial finance company. “Comfort Zone” It is the temperature range in which the body does not shiver or sweat, but has an idiomatic sense of a place where people feel comfortable, where they can avoid the worries of the world. It can be physical or mental.

Financial Myth No. 10
All finance companies require that your customers be notified that you are working with them.

FINANCIAL FACT: This is called notification and verification. Some finance companies allow non-notification factoring. This makes the financing transparent to your customer. “Take the plunge” If you take the plunge, you decide to do something or commit yourself even though you know there is an element of risk involved.

Read Part 1:
Evaluating Financing Options for Your Business: Myths and Facts

Recommended Books on Financing Options for Business:

 About the Author: 

Gregg Elberg was President of a Bay Area Savings and Loan for over twenty years. As part of the executive management team, he grew the financial institution from $13 million in assets to $175 million. He has extensive experience in the evaluation of personal and business credit. He has developed, underwritten and originated over $300 Million in Accounts Receivable Financing, Purchase Order Financing, Inventory Financing, and Commercial Real Estate Loans. During the past four years, he held a position with a major regional private commercial finance company.
Article Name
The world of commercial finance is complicated. To help you navigate the complexities of seeking financing for your business, here are the common myths and facts you need to remember.
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Category: Finance a Business

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