Lets talk financing

[carbidecraters]

What is the average percentage rate guys are paying these days? Who are you financing through and how much have you financed? Just starting a good inquiry for future buyers

[Mcgyver]

I've made a career out of that one line question, so am challenged to sum it up in a line financing what by what method, ie lease, term debt etc. if i assume a lease, most leases are in the 15-25% effective range, no thats' not the rate that's posted, but do a monthly discounted cash flow including commitment fees, security deposit, last months payment, etc etc and watch the rate climb. Leases are convenient and fast ,can be off balance sheet and care less about your covenant than a bank but are an expensive way to finance.

[Geof]

Originally Posted by Mcgyver .. most leases are in the 15-25% effective range,

Yikes! I have never leased, I guess now I know the reason why.

[WayneHill]

One payment, no interest.

Lease rhymes with Flease. The same holds true with cars.

[ViperTX]

Well leasing is still a viable way to minimize your up-front costs.....so, don't completely discount it....generally you can do a lease-to-own....it's a very viable way to jump start your business when you see alot of upside potential...

[Karl_T]

Banks don't like to loan against equipment and the loan rate shows it, if you can get the loan. They like to loan against property - stable value, no one will carry it off.

So, if you can, get a second loan against your house or business property. I think my rate is currently 6%. In my case, I've set up a $50,000 pre-approved line of credit. Very handy, buy the machine, write a check, go home with it.

karl

[Mcgyver]

nothing wrong with leasing, its just an expensive form of money. not as expensive as equity though. The basic tenet of finance is if you weighted cost capital (the blended cost of your equity, debt, leases etc) is less than the business's return on equity, you're making money

[Geof]

Originally Posted by Mcgyver nothing wrong with leasing, its just an expensive form of money. not as expensive as equity though. The basic tenet of finance is if you weighted cost capital (the blended cost of your equity, debt, leases etc) is less than the business's return on equity, you're making money

The kicker in this is that the debt, leases, etc, costs are fixed and due whether or not you have money coming in. If you are a jobbing shop operating this way and a major customer chooses to not renew their contract you go under within weeks. Or you knuckle under and lower your prices and die the death of a thousand cuts. I have seen companies go under both ways.

[Mcgyver]

you are exactly right, the technical term is business risk and financial risk - the idea is to balance the two. A job shop has a high degree of business risk - who knows what will happen next month, vs say a sugar refinery or utility that can maximize their return on equity by using lots of debt. its just a matter of balancing the risks, simple to say, more difficult to do.

[Geof]

Originally Posted by Mcgyver you are exactly right, the technical term is business risk and financial risk - the idea is to balance the two. A job shop has a high degree of business risk - who knows what will happen next month, vs say a sugar refinery or utility that can maximize their return on equity by using lots of debt. its just a matter of balancing the risks, simple to say, more difficult to do.

Yes and how many articles in magazines that offer advice on starting your own business give such succinct advice. Nearly always the emphasis is that leasing and borrowing is the way to go for best return on equity without any qualifiers.

[chronon1]

This is getting complex -- I recall taking an engineering economics class - salvage value , rate of depreciation .. not one of my favs but it was good info to learn - i learned the word 'superfluous' -- the professor wrote in red on one of my tests/homeworks/ i dont recall that i assigned superfluous value to an object....

[ViperTX]

Well there are ways to deal with risk.....avoid it completely, spread it over a larger customer base....negotiate contracts with minimum quantities over a specified period of time and an early termination clause....the options are almost endless....