Businesses are often challenged with securing capital i.e. type of capital and interest rate!
Altima Funding Solutions has been providing access to capital for fourteen years and the common concern of borrowers is the cost of funds. I am choosing to write this guide in hopes to help you fully understand what determines the interest rate.
Here are some of the variables that influence cost of funds:
- Cash Flow
- Risk: pertains to industry, cash flow, timing, tenure, profit and information. What industry are you in? If you are in retail or the restaurant industry, your industry has a high failure rate, so lenders are assuming more risk. Access to capital is limited and interest rate higher.
- Timing: How soon do you need the capital? The more you are able to prepare in advance and give the lender more time to vet your company, the lower the cost of funds i.e. if you need money tomorrow for payroll, we can achieve that, however; the rate is going to be much higher as the lender has a limited amount of time to do any due diligence, therefore can only make a decision based on the information in front of them.
- Tenure: How long have you been in business? Most businesses fail in the first 3-5 years. The closer or further away you are from the end of that spectrum the lower the cost of funds. You have weathered the gauntlet of failure and therefore less of a risky investment.
- Cash Flow: This proves your ability to repay the loan. The stronger your monthly cash flow statements without spikes or seasonality the lower the cost of funds. Examples of what proves cash flow: bank statements, cash flow statements.
- Profit: How much money you get to keep? Profit reflects management’s ability to control expenses, capitalize on market opportunities and more. The greater your profit the lower the cost of funds. Examples of what proves profit: Profit & Loss statements, Aging Accounts Receivable & Accounts Payable reports, balance sheet and tax returns.
- Information: The more information you provide a lender the higher the comfort level and therefore lowers the cost of funds. Examples: Application, tax returns, profit & loss statements, accounts receivables, bank statements and balance sheet.
Borrowers should always take an objective approach and ask themselves what would it take for me to lend someone like me money? Also do a risk/reward evaluation. My cost of funds is (X), my return is (Y) and if the return dramatically outweighs the cost of funds, i.e. (Cost is 15%) (Return is 25% or greater), consider accepting the funds and develop a strategy to make necessary improvements to attract better funding next time i.e. better accounting, more sales, improved efficiencies, higher margins, etc. There will always come a time when you will need to secure capital as it is virtually impossible to self-fund your business forever!
Altima Funding Solutions is a strong funding broker with a multitude of trusted lending sources specializing in solving your capital needs, thereby allowing you to focus on what matters. Growing your business!