The trouble with some M&A financing platforms can be summed up in the some of the advertising accompanying them. "Every entrepreneur should have the opportunity to get funding" says one.
Well...no they shouldn't.
At least not immediately. Not until they've taken a hard look at how much funding they will really need, what that funding will cost, and what it will mean for sustainability and growth. Entrepreneurs that are in love with the title but financially illiterate should not have the opportunity to get funding for an acquisition until they can figure out how much it will cost as compared to traditional financing methods, and what that means for long-term success -- and survival.
New-to-the-game platforms such as Boopos, Fleximize, and Uncapped provide funding for buying or growing small businesses. The advantages include quick prequalification in 48 hours or less, turnaround speed of as little as a week, and not linking to your other businesses or personal wealth.
It all sounds enticing, particularly against the backdrop of the more stringent requirements of bank financing and government-backed funding programs. Boopos, for example, advertises that it will lend up to four times a business's annual earnings provided it has at least $100,000 in annualized revenues. A speedy pre-approval process means a deal can be closed inside of 45 days.
So what's the problem?
In a word, speed.
In a phrase, it might be "Speed kills."
I always tell people that whenever you go to borrow, slow the pace down.
Why? Because you might not like the long-term effects of acting fast. Yes, you may need less surety to qualify for these loans and they might come quicker, but they also often come with a higher interest rate and a shorter term. These platforms usually require the loan to be paid back within one to five years, and that combination produces a heightened monthly payment that can rob you of the ability to hire, reinvest and grow, or make a profit.
While a bank or SBA-sanctioned loan routinely takes longer to qualify for and longer to close, a typical one is spread out over 10 years, at market or near-market rates, dependent on the solvency of the client. Borrowing $1 million this way, at 8¼ percent, would require a monthly payment of $12,265.
Now let's acquire the same funding through a financing platform like Fleximize or Boopos. That same million -- which, granted, comes more expeditiously -- will need to be paid back at a higher interest rate -- as much as 20 percent -- within 5 years -- or less!
At that rate, over three years, the monthly payment required for the upstart entrepreneur would be -- wait for it -- $37,163.
These are just examples, and these platforms tout a range of products tailored to the entrepreneur. These lenders want their upstarts to succeed, and the bigger the better. Reviews are mostly positive too, and Boopos, for example, pledges to "partner" with their borrower, using their investment expertise to analyze target companies.
Indeed, among the several catch phrases to be wary of in ads for these products, "friendly funding" is one that recurs -- and stands out. Rather than the speed of the financing or any promised support from its team of experts once you get going -- a pseudonym for scrutinizing investors -- concentrate on what your monthly payment may be, and whether you can afford it. Or want to.
Be careful, take your time, and read the fine print. A loan that offers to deliver fast cash may sound as down home as warm apple pie, but a close look may reveal enough to kill even the most promising long-term plan.