At Accord, we take the approach that we won’t lend money to a business unless we truly believe we’re helping them.
This is the first in a series of articles on using short-term loans to help small businesses succeed.
Short-term loans can be used by businesses of all sizes to fuel growth, manage seasonal cash flows, catch up on payables, buy small pieces of equipment, make repairs or renovations and more.
As is the case with personal finances, the right amount of business debt can be a good thing. Similarly, however, too much business debt can be a really bad thing, causing (as opposed to resolving) cash flow difficulties, stress, and overall increasing the risk of failure.
At Accord, we take the approach that we won’t lend money to a business unless we truly believe we’re helping them. That would seem to be not only an ethical approach, but also a common sense one. After all, your business lender is in effect a partner in your success. In our view, absolute success is when a client comes back to us, after repaying their loan, as tells is it was really “worth it”. In other words, they grew their business using the funds they borrowed from us, and both parties to the transaction fared well.
Part of lending to help you succeed is lending you the right amount. We do our best to try and match clients up with the amount of money they need (not necessarily what they apply for) for a term that matches the use of the funds. For instance, if you’re borrowing money for inventory, depending on the industry you’re in, you should be able to turn that inventory over several times a year. Thus, it would make sense that we lend money for that purpose for a term equivalent to the time it takes to order and sell that inventory, with some room to spare, as of course not everything always goes perfectly according to plan.
Here’s another example. We often have clients, or their brokers or representatives, apply for a short-term loan. Our credit department will review and, if the client meets our criteria, inform of our approval terms.
Often, the client or their representative will come back and say:
“Lender X will lend way more than you guys to the client. Will you match it?”
In short, most often our answer is NO. Here’s why:
We do our best to avoid these problems by advising clients to borrow as little as possible from us. Sounds weird, right? But we’d rather do it over the longer term – have the clients need more as they grow and succeed, as opposed to a one-off, traumatic, difficult situation.
We see many alternative (non-bank) lenders take the approach that they’re looking for, essentially, a live body (client) and business entity, to push as much money out to, at as a high a cost of funds as possible. Whether the amount of and terms of the loan make sense often appears irrelevant. The strategy, from what we can see, is not to help set the client up for success, but rather to get the client to agree to take the money (often more than they can afford).
This often leads to the unfortunate situation where the client ends up paying interest on funds they really didn’t need. Even more unfortunate, often the borrowed money is spent quickly (there’s a moral hazard associated with having funds that you don’t need – all projects/needs get money, as opposed to, say, your 1 or 2 top priorities). The client is then left with a significant debt that the cash flows of the business can’t sustainably repay. Many of these lenders have large collection departments – because collections are the focus of their business. Clients end up finding themselves in a very unfriendly and imbalanced, unhappy, situation. The collection departments do what they do – call, call, call, pressuring the client to make payments they can’t afford. Soon, the client is in a highly distressed situation, both in the business, and personally, as they try to keep up.
We do our best to avoid these problems by advising clients to borrow as little as possible from us. Sounds weird, right? We as lenders have bosses who want us to grow our portfolio of loans of course. But we’d rather do it over the longer term – have the clients need more as they grow and succeed, as opposed to a one-off, traumatic, difficult situation.
Getting back to how we handle short-term loans, is we, again, advise the client to borrow just what they need, with as short of a repayment term as they can handle. We then give them the option to come back to us, when they’re part way through their term, to re-advance to their previous credit limit, or request an increase in their credit limit at that time. This type of structure a) minimizes the interest cost to the client, and equally importantly b) maintains the greatest amount of flexibility for the client. As well, because it’s easier to guess or forecast how business is going to be in the short term versus the long term, clients can borrow, not borrow, or adjust the amount they borrow as their business ebbs and flows.
Whether you deal with us or another lender, we strongly encourage small business owners to follow the strategy: borrow just what you need, borrow for as short a term as possible, and re-advance when necessary. Maintain your flexibility, and don’t stretch yourself. Don’t judge a lender by how much they’re willing to lend you – they may not necessarily have your best interests at heart.