By Roger McNamara
Guide2Interchange
Have you ever asked a question on a sales call and received an answer that just didn't make sense? As sales professionals, we are conditioned to be nice to our prospects. We are taught to be professional. After all, we want the sale. It would do us little good to be antagonistic. We asked a question, and we received an answer. Prospects always tell the truth, right?
For financial services representatives selling card acceptance as an alternative payment method, knowing how your prospect borrows funds and what they pay for funds is critical to your success. Likewise, it is critical to know if prospects use their own funds to finance receivables and what that actually costs them in ROI. Conversely, if those same funds were used to grow revenue rather than on collections, what would the return be?
Recently, a colleague of mine reached out to me to discuss the cost of funds. They led with the premise that selling in the B2B space had to be difficult at this time, as the cost of funds was so low. If that narrative is out there for long enough and often enough, it must be true, right? Not so fast.
Today, businesses with receivables have choices regarding how to finance them. They can borrow to finance them from an external source. As a business waits to be paid from its buyers, the business, in turn, has to also pay its bills. Think of the typical business. It has labor and wages to pay, rent, electricity and everything else to keep the business functioning.
If a business doesn't borrow funds, this typically means it has cash on hand, usually the product of a well-run business. But does this mean the enterprise is being run as well as it could be? Cash not put to work in the business will fail to yield a rate of return on the capital, which should exceed the value of cash being used to collect debt.
It might be surprising to see the average cost of common types of business loans shown in the chart accompanying this article. These figures are not from 40 years ago; they are from 2021.
Banks and financial institutions are generally for-profit businesses. They make money by lending money to businesses that need it. They do this by lending to other businesses a portion of the deposits they hold or by lending money they borrow from another bank, which they have to pay for. The guiding principle for the rate they borrow at is prime rate or, in street terms, the Wall Street Journal prime rate. It currently sits at 3 percent above the federal prime rate of .25 percent or 3.25 percent.
| Loan Type | APRs |
|---|---|
| Bank | 3.25% - 13% |
| Commercial | 3% - 11% |
| SBA | 2.4% - 8% |
| Non - profit | 3.25% - 8.5% |
| Medium - Term | 4% - 30% |
| Short - Term | 6% - 80% |
| Invoice Financing | 11% - 60% |
| Equipment Financing | 3.25% - 20% |
| Merchant Cash Advances | 35% - 300% |
As sellers of funding, we are often in conversations with finance types about their cost of borrowing. Sometimes it seems like an Olympic sports event where you are told of these incredibly low rates businesses were able to obtain. And with each call you make, it gets lower and lower.
The conversations go something like this:
Question: “So, what is your weighted average cost of capital?"
Answer: “Yeah, we are paying 2 percent right now.”
Two percent? Can this be right? you wonder. And then you think: I am not sure about this; I have heard that funds are cheap today; this seems to confirm that; as a result, I will never be able to sell this supplier, because I am a more expensive option for them to collect those receivables.
Think again. The key with any financial sale is doing your own homework. At any rate (no pun intended) stop listening to the noise that says money is cheap. Sure, for good businesses that have great credit and an excellent history of paying creditors on time and in full, funds will be less expensive than for those that do not. This is just the same as it is in the consumer world.
Don’t be fooled by your consumer experience, though, just because, for example, you bought a car recently at 0 percent financing. You might have got 0 percent because of your good credit, but someone is paying (the manufacturer) the cost to loan you the money to get you into the car. Banks are in the business of making money and they are not in the habit of lending money to businesses to lose money. They have to cover their cost to borrow and to lend.
Learning to question what you hear when it does not make sense is extremely important. If we don’t question what we hear, we will inevitably lose potential opportunities without even exploring them. Allowing erroneous information to exist in our sales process only serves to delay the sale and frustrate the parties involved. Make sure you know your industry, and get the information from those that can provide it. This will make you more informed and better at what you do.
Money is never free. Discovering the cost you sell against is paramount, because if you don’t know what someone pays for money, how can you replace it with your option? 
Roger McNamara, president, Guide2Interchange LLC, is a 25+-year veteran of the payments industry, most recently as the director of business development with American Express in the United States. He has sold more than $200 billion worth of card processing and now leads a B2B merchant sales training organization. For more information, see Guide2Interchange@gmail.com or call 561-379-3151.
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