I’ve been there.
I know what it means to own a company that’s operating hand to mouth. More to the point, I understand what it means for a CEO to view their bank accounts and not know if they can make the next payroll. Panic ensues.
At just about that time, an email, text or postcard comes in the mail offering that business owner a lifeline; a working capital loan that can close in as little as one day. It appears at first glance to the “non-bankable” company as the answer to their prayers and probably too good to be true. Take caution, because that very well may be so.
Working capital brokers show a relentless pursuit in closing loans. It’s no wonder with interest rates for this kind of product falling between 15 and 60 percent. Agents who successfully entice a CEO to take a working capital loan catch them at a weak point and send documents for an electronic signature that the business owner rarely reviews. In doing so, they often put their company in great long term peril to achieve a short term reprieve; one from which they may not recover.
That’s because the costs of obtaining working capital can overburden an already stressed cash flow situation. Take this hypothetical scenario as a good example. A business owner secures a $50,000 working capital loan to make the next payroll run thanks to a well-timed cold call by a broker. The average terms for these loans are a seven month payback period with a total cost of $65,000. The CEO or business owner must come up with a fixed daily payment of $422 every weekday to pay it off, adding a $8,500 monthly expense line in the process. What’s more, many alternative financing companies won’t allow the loan to be paid off early at a reduced cost. They’re on the hook for the entire $65,000 regardless. So while working capital loans may appear at first glance to offer a much needed financial break, it can wind up acting as an accelerant to a business’ demise.
While I understand that time is often of the essence for business owners looking at securing a working capital loan, it may be of great benefit to take a moment and get a second opinion on options. Find a licensed broker to talk with; one that operates out of a real office that you can visit. They’re the ones you can rely on for real advice on other alternative financing packages, such as equipment financing, that may provide the capital needed at a fraction of the cost. If the broker is worth their weight, they will respond quickly, understanding that the business owner needs answers fast.
I know. I’ve been there.
About the Author: Todd Stichler is the Founder of LendSpark, a business advisory service that assists companies in accessing multiple lines of financing, including traditional and alternative banks. He can be reached at [email protected]