Lower Cost Loans May Not Be The Best Value

Marketing strategy ultimately boils down to companies differentiating themselves from their competitors based on claims of superiority in either the area of price, product or service. In the area of price, companies position themselves as low-cost providers or else they convey themselves as higher-cost providers whose perceived value is worth the higher price they charge.

When competing on product quality, companies emphasize the technological superiority of their products; and if service is their differentiator, they position themselves as providing customer service that is consistently superior to that offered by their competitors.

In all industries, there will only be one lowest price (though many companies may offer the same price). And while some might tend to think that most people buy products or use services based primarily on price, if that were truly the case, companies like Neiman Marcus, Mercedes Benz and Four Seasons properties would be out of business.

Price vs. Value

That being said, when you’re looking to secure asset based financing, while it’s tempting to look for, and choose, the lowest-price provider, that might not truly be in your best interest. For what appears to be the lowest price, may not really be the best value. Therefore, comparing lenders based solely, or mainly, on the interest rates quoted, does not tell the whole story. There are many other factors to consider and analyze including:

Strength of Relationship

How important will you be to the lender? Will you be one of the smallest clients or the largest?  Will you have access to the decision-makers, especially if you need them to make a decision on your behalf? Will the lender be there if your business gets into trouble? And will the lender provide extra service or just the bare minimum?

Capability to Expand Credit Line

Will the lender grow with you and help you take advantage of business opportunities?

Flexibility to Alter Terms and Conditions

Will the lender provide over-advances or side loans from time to time?

Reactions to Shortfalls in Projections

Will the lender be open to restructuring your credit facility and help work out a plan or just ask you to leave when things get tough?

Covenants and Restrictions

Will covenants make it difficult to run your business the way you want or hinder your ability to grow your business? Will the lender assess fees or increase rates if covenants are broken?

Effect of Change in Lending Officer/Contact

Who will handle the day-to-day relationship? Is the main contact backed-up by others?  Will management be involved in the relationship?

Administration and Reporting

Does the lender provide online reporting capability? What specifically are the daily and monthly reporting requirements?

Overall Comfort Level

Do you get the sense that the lender truly understands your needs? Will the lender do what they say they’ll do? (The best way to find this out is to probe references.) Is the lender responsive? Can you work with the lender?

Long-term Gains

While it may be difficult to see the impact of some of these factors up front, in the long run, it will pay off to do as much analysis and ”what ifs” as possible before you have a lender begin the due diligence process. In your analysis, you may find that some of the lower-cost providers have more restrictions than you would like or that they require you to come up with more money up front. For example, a lender may require:

  • A certain amount of excess availability (a dollar amount that must be kept available after funding)
  • Payables brought back down to 60 days
  • An opinion letter from an outside attorney (that can cost anywhere from $15,000 to $25,000)
  • A cap on your salary or a condition that you cannot receive other forms of compensation for the duration of your contract
  • You to pay off an old, low-cost debt

Each of these possible requirements needs to be weighed and evaluated against the interest rate factor. In some cases, you’ll find that all of the conditions a lender may place on the deal may actually cost you more than what the difference in interest rate reflects, or that the conditions placed on the loan hinder how you’re able to run your business. That alone may be too high a price to pay.

And what length term is each lender proposing? Some lenders try to lock clients in for three years; others will write six months or one-year terms in an effort to help you return to more traditional (and less expensive) bank financing sooner as opposed to later.

Another important factor to evaluate, especially if you need financing quickly, is to make sure that when the lender completes its due diligence, they’ll still want to do the deal. Sometimes deals that are on the low end of a lender’s financing range will be turned down after audit just because the decision-makers feel the deal is too small.

As it’s generally a business development person who has made the initial proposal to you, try to get some kind of commitment up-front about the true decision-maker(s) willingness to move forward. You don’t want to spend needless time on a lender who may not truly be committed to your needs.

In summary: “lowest price” may not equate to “best value.” It pays to look beyond an interest rate comparison to find an asset based lender who best meets your business needs.