When business funding is needed quickly, an offer can feel like a solution. The easier it is to accept, the more important it is to check what the agreement will cost and how repayments fit the business.
We are seeing more and more businesses enter into financial arrangements that they haven’t fully understood (some examples are below). You may not be a funding expert – that’s where we come in – but you need to know what to look out for.
Ask More Questions Than You Think You Should
It’s essential to ask the right questions. What is the interest rate compared to other options and what is the impact on your profits. Is the broker being paid a commission and have they disclosed it to you? Does the repayment schedule leave you enough room to trade?
A low sounding rate may be calculated differently from the one you expect. A monthly figure can hide a high total cost. Weekly collections can drain cash faster than a monthly projection suggests. The wrong product can also limit future borrowing.
Before you agree to anything, ask for the full terms in writing and test them against your cash flow, not just your immediate needs.
What Does the Quoted Rate Really Mean?
One business came to Pegasus Funding Solutions after another broker had described a £30,000 loan as being offered at a very good rate.
The proposed repayments were £3,700 a month for 12 months, which were affordable: £44,400 in total, or £14,400 above the amount borrowed. When we reviewed the offer, we identified an 87.39% interest rate for the 12 month period. The client was horrified by the difference between the description and the cost.
We also found that the broker was due a 15% commission that had not been disclosed to the client. According to the information we reviewed, that commission had directly affected the interest rate charged.
This example shows why quoted rates, cash repayments and broker remuneration all need to be understood together. Always ask for the total payable and an explanation of how every charge has been calculated.
Could Several Short Loans Create One Large Problem?
Another business came to us after obtaining a series of loans through a different broker. Together, the loans exceeded £500,000, with reported APRs ranging from 95% to 152% and terms of 5 to 18 months.
Across those loans, interest payments totalled £234,728.29. The mix of weekly and monthly repayments meant the business faced almost £112,000 a month in combined payments for a five month period, until the weekly loans were repaid.
The client told us that the commissions paid to the broker had not been disclosed. Those payments deserved particular scrutiny alongside the lending terms. The immediate question was whether the business could carry the combined repayment burden, rather than whether it could obtain another loan.
How Can You Avoid Starting a Borrowing Cycle?
Make sure you always match finance to the reason the money is needed and to the period over which it will create value.
A fixed term loan may make sense for an asset or expansion that will generate returns over several years. A short cash flow gap caused by slow paying customers calls for a different solution. If completed work will be paid in 30, 60 or 90 days, a conventional loan may cover one gap while adding repayments to the next one, but could there be a better solution.
This can make another loan seem necessary. As facilities accumulate, payment dates and total cost can become harder to manage.
Before you over-commit, consider whether invoice finance or another more flexible solution would address the timing of receipts more appropriately. The right answer depends on the business, its contracts and its ability to repay.
Before you sign up for any finance agreement, model all existing and proposed weekly and monthly payments together. An offer can appear affordable in isolation but you’ll seen realise that the combined schedule is not when payments are due.
Six Questions to Ask Before You Sign
- What will we repay in total?
Ask for the amount advanced, every fee and charge, each payment date and the total payable over the full term. Compare this with the cash the funding is expected to generate.
- What does the stated rate actually measure?
Ask whether the figure is an APR, a flat rate or another calculation, and request a like for like comparison. Check the term and payment frequency as well as the headline percentage.
- How is the broker paid?
Ask whether the broker receives a fee or lender commission, how much it is, and whether it affects the recommendation or price. Request the disclosure in writing before committing.
- Do the repayments fit our cash flow?
Combine the new facility with all current commitments, including weekly collections. Test the busiest repayment months against realistic receipts and a delayed payment scenario.
- Does this product fit the purpose?
Check whether the term matches the benefit the funding will create. A recurring timing gap may need a different facility from a long term investment.
- What flexibility and security are we accepting?
Check personal guarantees, charges on assets, late payment terms, early repayment costs and whether the agreement could restrict future funding.
Get an Independent Review of the Offer
Even if you’ve worked with another broker up to this point, you can talk to us to help get some clarity about what you’re considering. Our transparent approach will ensure you know exactly what you’re entering into, and we help you develop a financial strategy that is right for your business and your goals
Pegasus Funding Solutions can help you understand what a proposed facility will cost, how the broker is paid and whether the structure suits your plans.
If you have received an offer or are concerned about existing borrowing, book a confidential conversation with us before making your next decision. Call 0203 327 0567 or request a callback here.