Moore’s law observes that technology performance doubles approximately every 2 years. While the decades-old observation continues to hold true in the technology realm, I keep on finding that Fast, Cheap and Good still applies to everyday life and business.
Here are some examples:
- Build a Home: You can build it Cheap and Fast; but not Good
- Buy a Car: You can buy a really Good car; unlikely that it will be Cheap
- Buying Dinner: Fast Food can be Cheap; rarely Good for your health
The same adage applies to the finance industry – simply – Fast Cash is not Cheap.
Prior to the proliferation of the internet, a typical means of getting fast cash was a trip to the Payday loan shop or a visit to Guido the pawn broker. No offense to Guido’s profession, but he, too, has fallen victim to Moore’s Law in that his colleagues have evolved into virtual loan sharks. Financial Technology companies (aka FinTech) are the web-based lenders whose model is meant to circumvent the commercial banking community in favor of algorithmic scoring of personal credit scores for a quick loan approval.
I understand that not every company can qualify for conventional bank debt, nor do they always have the luxury of waiting weeks (sometimes months) for bank loan approval. However, many of these FinTech lenders choose to exploit their position in the financial ecosystem by charging high rates with unfavorable terms.
As a business owner, you’re focused on running your business; the minutia of loan documents and interest rates (is that an annual or daily rate or a management fee?) is not on your mind. Anyone can be forgiven for committing to an offer with the appearance of reasonable pricing in glossy advertisements. What looks at first blush like 3% money may actually turn out to be closer to 48% effective interest rate once the fine print is scrutinized.
Companies lending fast cash are hardly ever cheap, most of these lenders have models built on fast turnover and fast funding. However, a good a banker will take several days to underwrite a loan and this is still how a majority of loans are underwritten.
A business owner should keep in mind – there is an inverse relationship between the cost of capital and the time from start of application to funding. The lowest cost of capital simply takes time.
Cash is King. The best cash depends on how you use it. Is the loan going to generate a return that makes the cost insignificant? If so, regardless of cost that is a good deal for your company. If the loan is filling that gaps on recurring losses – perhaps the business model is the issue or G&A is too high. Remember the saying – don’t throw good money after bad.
When I’m approached by business owners asking for help in shedding the handful of high-interest loans on their balance sheet, it all inevitably started with a “fast money” loan from a FinTech lender. Take the same precautions you would in vetting a business partner. Make sure your capital provider will be there for you in good times or bad – and ease off the google search engine when you feel so inclined to take a virtual trip to see Guido.