Armand Rousso — Avoid These Financing Mistakes in Small Business
When taking on finance as a small business, the appropriate course of action always relies on answering this question: what am I trying to achieve?
The thing is, financing choices don’t exist in a machine. Small businesses often miss the necessary details when evaluating whether to borrow or not, such as the full funding cost, the drain on their time, the opportunity costs and baked-in fees.
Armand Rousso is prestigious personality as founder of Accoona.com, a business-to-business search engine and X3D Technology, which develops 3-D technology for the internet. Armand Rousso is also a consultant for high technologies. Presently, he is also involved in stamp trading.
Here are the common pitfalls and the best ways to avoid them so your small business can choose the best option at each stage of your company’s growth.
Be aware of your real interest rate.
Surprisingly often, people who think they know how to determine interest prices often don’t. I even see editors from major national newspapers frequently get it wrong.
For example, if you borrow $1,000 and pay $1,100 back over three months on weekly payments, your interest rate wasn’t 10 percent, as simple math would specify. Taking a closer look at the time frame for the note and your average principal outstanding reveals that it’s actually closer to 80 percent. That’s a difference of 70 percentage points in your funding cost.
This mistake happens because most businesses simply calculate APR as total fees divided by the amount obtained, rather than calculating the interest based on the amount excellent at every point in time. The difference is massive for small businesses as financing mistakes are compounded. In the example above, the actual annual rate is eight times higher than the optical
Pay attention to hidden fees.
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When taking out financing you must take into account source fees. Many creditors charge source fees of 3–4 percent, which are subtracted from the loan amount. Depending on how quickly you pay that loan back, that fee can have a large effect on the true attention rate you’re paying.
A $30 fee on a $1,000 loan is really a 3 percent fee upfront that will significantly skew your real APR, especially for short-term loans. It’s very similar to ATM fees that seem like a small amount, but can cost you big over the long-run.
When credit money, be aware of the fees that accompany the capital infusion: management fees, application fees, contract fees, due diligence fees and more. These fees are sometimes hidden in the fine print, so comb through everything carefully before moving forward.
Treat opportunity cost like a real cost.
Banks regularly take up to two weeks to evaluate a loan program and, if approved, another 15–60 days to fund the loan. For executives running a business, that’s time they could have spent producing sales and growing the company. The lowest APR doesn’t always provide the best financing option when you take into account the loss of time spent elsewhere.
The indicating that time is money still holds today. Look for creditors, online and off, that can move at the speed of today’s business and facilitate the application process so you can spend your time making money, instead of jumping through hoops to borrow it.
Besides the chance cost of your time, also consider the cost of timing. If you’re looking to take on extra work or buy inventory, the timing of a bank loan may or may not work out.
The intangible costs for smaller or short-term loans can be greater than interest.
The loan volume and pay period matters a great deal. Often, companies in need of working capital are borrowing smaller amounts and paying it back over shorter periods of time than standard, long-term loans. These need to be approached differently than more time-term loans for large amounts.
In these circumstances, the actual attention rate can be the least important concern. Since the amount sought is small and paid back rapidly, such financing wouldn’t accrue the large amount costs common in loans of six months or longer.
Sometimes, costs outside of the actual loan should take priority. For example, if you pay a bookkeeper $50 an hour to work on processing a loan for two hours, that’s $100 that needs to be assessed on the total cost of the loan and is often a greater cost than the interest itself. Too often these costs are completely overlooked.
Don’t let the small size of the loan fool you. Taking a comprehensive approach to assessing all costs — associated fees, parties involved and period of payment — will pay off huge dividends.
