I have a client who owns a few coffee shops in the Philadelphia area. Last year, he was presented with a rare opportunity to lease a space near Rittenhouse Square, a prime location in the city. However, his prospective landlord required a significant up-front deposit to secure the space within 24 hours. My client didn’t have that kind of cash on hand. So what did he do? He turned to Kabbage, an automated online lending platform for small businesses. He was approved in time to put down a deposit and win the new location. Within just a couple of months he was able to pay back the loan—which saved him even more since Kabbage doesn’t charge pre-payment fees. Business, not surprisingly given his central location, has been booming.
This is an example of a client who understands the purpose of a short-term loan. Sometimes I meet business owners who don’t. It’s a mistake.
When people think of 6 to 12 month financing like what Kabbage provides, they look at costs. Yes, these loans can cost more than getting money from a traditional bank. But my client wasn’t thinking cost. He was thinking opportunity. He was calculating return on investment (ROI). He didn’t have the cash on hand to land this plum spot and his bank would’ve never turned around the amount of financing he needed in the time he needed it. He had to move fast to secure the kind of location he knew, as an experienced retailer, would provide a significant long-term revenue stream.
It doesn’t matter what kind of investment opportunity you’re looking at. As a business owner you may be thinking of hiring more people, buying new equipment, expanding your warehouse or putting down a deposit to secure a prime retail location. What matters is your return on investment. In a perfect world, you wouldn’t have to worry about costs. But in reality, different opportunities come with different costs and the cost of financing is a big part of the equation – whether it’s a traditional bank loan or an ongoing line of credit from an online lending platform like Kabbage. But the cost shouldn’t hold you back if your return on investment is worth it, and new online lending solutions solve a real challenge with which many banks have difficulty.
The next time you’re thinking of making an investment in something (or someone) do your ROI calculation carefully. Kabbage offers an ROI calculatorto help you estimate how funds can work for your business. Figure in the cost of financing. Look forward five or seven years and estimate your revenue stream from the acquisition. What kind of return are you getting? If leaving the money in your savings account is more profitable, walk away. But if your ROI is significantly more than that – I’d advise at least double or triple – then go for it.
Sometimes paying a little extra to make more money over the long-run is worth it. Don’t make the mistake of prioritizing the short-term cost of capital over its long-term return.
This post is sponsored by Kabbage. Thoughts and opinions are my own.
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