It goes without saying that interest costs should always be a key consideration when factoring the total cost of a business loan.
However, borrowers who are considering a small commercial loan from their bank or many other lenders need to beware of a surprise intangible cost that can actually end up costing them MORE than the total interest payable: loan administration.
That is, most loans will oblige borrowers to hire an accountant or bookkeeper to process the loan, and make sure all of the numbers add up. These intangible (labor) fees are REAL costs that must be considered when assessing the total cost of borrowing.
For example, most accountants charge around $75/hour for their services – and this can be higher in some cities. Bookkeepers can cost about $50/hour. If administering a loan involves hiring an accountant for five hours, then that’s $375 right there. Or if a bookkeeper needs to be hired for eight hours, that’s $400.
Obviously, this is money well spent — good accountants and bookkeepers, respectively, are certainly worth their fees! However, the point here isn’t whether borrowers should feel good or bad about having to spend this money: it’s that they simply must spend it to administer their loan (whether they like it or not!), and this has to be added to the overall cost.
So extending the example further, let’s say a borrower receives a small commercial loan of $10,000, and pays back $10,300 in three months. The interest cost is $300. But if the hired an accountant for five hours at $75/hour, the intangible cost of administering the loan is $375. That means the REAL total cost of borrowing is $675 – not $300. That’s 125% more!
The Advantage of Working Capital Loans
And that brings us to working capital loans, and what is clearly one of their most advantageous features compared to conventional loans, whether they’re small commercial loans or large ones: automatic payments.
When you apply for a working capital loan, you don’t have to worry about administering the loan, because repayment is handled automatically. Each day, a small pre-agreed upon fixed amount is automatically deducted and applied to your loan balance. This continues until the loan is fully repaid. And while you can track the status of your loan anytime, there’s simply no administration required, nor any concern that you may be paying too much, too little, or might miss a payment because you’re too busy running your business.
Or, if you receive a merchant cash advance (which is suitable if most of your transactions are via payment card), then the daily amount withdrawn will be a small percentage of sales, rather than a fixed amount.
What’s more, if for any reason you wish to pay your loan back early – and therefore save some interest – you’re welcome to do so. There’s no early payment penalty. Of course, you’ll never be asked to pay your loan back ahead of time.
The Bottom Line
When evaluating your small commercial loan options, it’s important to keep interest costs in mind. However, it’s just as important to look beyond this and identify all intangible costs. When you do, you may discover that a working capital loan is not just the simplest and fastest way to put cash in your account – but also the most cost effective, too.
Call Mulligan Funding at 855-326-3564 to discuss your financing options today!
The information shared is intended to be used for informational purposes only and you should independently research and verify.
Note: Prior to January 23, 2020, Mulligan Funding operated solely as a direct lender, originating all of its own loans and Merchant Cash Advance contracts. From that date onwards, the majority of funding offered by Mulligan Funding will be by Loans originated by FinWise Bank, a Utah-chartered Bank, pursuant to a Loan Program conducted jointly by Mulligan Funding and FinWise Bank.