Not all finance is the right kind of finance. Make sure your solution is matched to your needs.
It seems obvious when you state it like that but it’s not always clear to business owners that some finance can be a powerful enabler to their business and the same kind of finance to another business could be like a noose around their neck.
Earlier in the week I was chatting to a wine maker from South Australia’s McLaren Vale region. In learning more about each other’s businesses he asked me if I helped with unsecured loans. He then went on to explain he previously had two (from two of the more expensive providers) – in his words – they’d nearly killed him.
These products can be great but they can be terrible too. Roughly speaking the lenders will give you an amount up to your monthly turnover and, dependent on the lender, they’ll want that money paid off within a year (you might also get 2 or 3 years but they prefer 1 year and will restrict the term for many customers that approach them directly). If you’re a business with great margins and consistency in your cash flow, this kind of finance can be an ideal solution. However, if you’re a business with smaller margins and you rely on high volume sales to make a profit then a market fluctuation beyond your control, or some other kind of change in circumstances, could result in a challenging set of circumstances. Particularly if you borrow near to your maximum amount.
A better solution for this kind of business would have been to cash out equity from some of their unencumbered assets or machinery. This would have yielded the cash flow solution they required but with an interest rate that was less than half of what they paid on their unsecured loans as well as the option of up to a 4 year term instead of the steep obligation that obligated them to paying out the debt within 12 months.
Small business lending is a rapidly changing space and with lenders approaching accountants with kickbacks for referrals it pays (and protects) to make sure you’re getting expert advice before choosing the loan that’s right for you.