Industry
Part of Loans by industry: five cash-flow pointers
Loans by industry mistakes: six offer-sheet checks
Loans by industry mistakes that show on the offer sheet: how repayment is taken, annual cost, pre-revenue months, retention, term and a decline letter.
A loan offer can be wrong in ways the headline price hides. The offer sheet and the decline letter are the two documents where a loans by industry mistake finally shows, long after the search that led to them. Each check below names the trade where the mistake bites hardest.
Choosing a product to fit a trade's cash cycle is a separate task, set out in loans by industry. These checks assume an offer already sits on the desk.
What to take away
- A product marketed to your trade is still just a product. Judge it on repayment shape, not on the picture in the advertisement.
- Convert every offer to one annualized cost before you compare it with another.
- Test every offer against your worst trading period, not your average one.
- A decline is information about one institution's current policy, not a verdict on your business.
Six checks on the paper in front of you
Run each check on the offer sheet before signing anything, and write the result beside the offer. A check you cannot answer from the documents is a question for the lender, and an offer that cannot answer it is itself a finding.
| Check | What to read | Mistake it prevents |
|---|---|---|
| How repayment is taken | Holdback percentage or fixed daily or weekly withdrawal | Funding slow weeks out of working capital |
| Annual cost | Everything paid above the amount advanced, over net cash and term | Assuming a specialist is cheaper |
| Months before revenue | Whether the amount covers the time before you can earn | Leaving them out of the request |
| Retention | What is withheld from each payment, and until when | Counting retained money as cash |
| Term against asset | Whether the term outlasts the asset's earning life | Paying for a machine you are budgeting to replace |
| A decline | Which institution said no, and on what policy | Reading one lender's policy as a verdict |
How does the offer take its repayment?
A fixed daily or weekly collection is indifferent to your season, your project schedule and your customers' payment runs. It takes the same amount out of a dead week as a peak one, so read the repayment clause against your worst period, not your average.
A restaurant in a slow January, a roofer in a wet month and a retailer in February meet the same withdrawal. Where revenue arrives in waves, a smooth outflow against a jagged inflow is filled from working capital, and when working capital runs out the remedy usually offered is more of the same product.
Merchant cash advances are the clearest case. Under the CFPB's small business lending rule, which implements Section 1071 of the Dodd-Frank Act, they are financing structured as a sale of future income. They are repaid either through a holdback percentage of daily card receipts or by a fixed daily withdrawal until the agreed amount is satisfied.
Look for the worst instance in the last two years rather than the typical one, because the worst instance is what the financing has to survive. That sequence, followed all the way through on an invented business, is in merchant cash advances examples.
What does each offer cost a year on the cash you receive?
A specialist lender is not cheaper because it understands your trade. Sector familiarity shortens the explanation, reduces the odds of a decline on a misunderstanding, and sometimes produces a structure a generalist would not have offered. None of that is the same as a lower price.
Convert every offer to a single annualized cost against the cash you actually receive:
- Add up everything you pay above the amount advancedinterest, origination, documentation and any recurring fee.
- Divide that total by the net cash that reaches your account.
- Divide the result by the term in years, because a cost recovered over six months is not the same annual burden as the same cost over a year.
Then compare offers on that one figure alone. Familiarity that saves you two weeks is worth something; familiarity priced as though it were worth several points is not. The wider method for putting offers side by side is in loans by industry comparison.
Does the amount cover the months before revenue?
Size the request to include the months before you earn, not only the equipment bill. Trades with licensing, permitting, inspection or certification lead times spend money for a period during which they are not allowed to earn.
A restaurant fitting out a kitchen, a clinic waiting on certification and a contractor holding a crew while an inspection is scheduled all meet this. The equipment quote is easy to total. The months before the doors open are not on any quote, so they are frequently left out of the request.
Count them, cost them, and include them in what you borrow, or accept that they will be funded by something more expensive arranged in a hurry.
Which part of the invoice will actually arrive?
In contracting, a portion of each payment can be withheld until long after the work is finished. It is revenue in your accounts and it is not in your account, and anyone financing your invoices treats it differently from the rest of the invoice.
Track retained amounts separately from day one, with the release conditions written next to each. Those conditions are the contract's own, such as final completion, a certificate of occupancy or the end of a defects or warranty period, and they are the dates that decide when the cash arrives.
Anyone lending against your figures will notice the difference before you point it out. A ledger that already separates retained money, and shows what each release waits on, is a ledger that finances more easily.
Does the term outlast the asset?
Check the term against the asset's earning life before you look at the payment. Matching a term to an asset's working life sounds obvious and is routinely got wrong, usually because a longer term produced a payment that fitted the forecast.
A walk-in cooler, a tractor unit, a dental imaging suite: the result is paying for a machine while budgeting to replace it. Where the asset ages faster than the paper, the options narrow every month.
Reviewing agreements against the assets they bought, once a year, catches this while there is still a choice. The method is in equipment financing review.
How should you read a decline?
A decline is a statement about one institution on one day. Institutions maintain their own views on which trades they will serve, driven by their own loss experience and their own supervisors, and those views differ between lenders and move over time.
The Federal Reserve's survey of senior loan officers exists precisely because standards tighten and loosen across the whole system, independently of any individual borrower.
Ask each lender, before applying, whether it currently writes business in your sector at your size. The Equal Credit Opportunity Act and Regulation B apply to business credit too, so ask a lender that declines you for notice of the decision, and for its reasons, in writing.
A pattern of declines is worth taking seriously, but treat it as a prompt to examine how the file is presented rather than as proof about the trade. Compare the declines lender by lender before drawing any conclusion about the business.
What the six checks have in common
Each one replaces a label with a measurement: the trade name for the cash cycle, the printed terms for the bank statement, the specialist's familiarity for the arithmetic.
The correction is the same in every case: take the number off your own records and test the offer against it.
For a neutral overview of how business financing is structured, with nothing being sold, the SBA business guide is a reasonable place to begin.
Common questions
Which check should I run first?
How the offer takes its repayment. A repayment obligation that does not flex against revenue that does can convert a slow season into a solvency problem, and it does so faster than any pricing error.
Is there ever a good reason to take the sector-branded offer?
Yes, when it is genuinely cheaper on the annualized comparison, or when the structure it offers is one a generalist would not write. Establish that before deciding, not after.
Does a decline mean my trade cannot be financed?
No. A decline is information about one institution's current policy, not a verdict on your business.
How do I find my worst month if the business is young?
Use the worst you have, say so plainly, and stress the forecast further by hand. A young business with an honest downside case reads better than one with a smooth line.
