I have a “side hustle” when I’m not occupied with running the CFO for Rent business; it’s investing in commercial real estate, along with some of my clients and close friends. It’s the business I’ll pursue more fully when I’m no longer offering consulting services, and the brokers and money lenders know that. Our office gets offers to buy real estate, or money to help us pay for, it every day. And since so many of them don’t even mention real estate, I’ve concluded that they’ll lend money to anyone for any purpose if they’re remotely close to qualifying. And I’m guessing you are seeing that same kind of traffic in your inbox as well, which gave me the idea for this post.

But why should you read it? Because you or someone you know is considering taking out a loan at a really bad time.

In our real estate business the choice of how much to borrow gets down to some relatively simple numbers (unless you’re a value-add investor when it gets more complicated). We compare the income from the property, and its predictability, with the interest rate on the loan, and its term (primarily) and we profit from the spread between those two metrics. If you earn a 6% gross return from an investment but you pay 5½% on your mortgage, there’s not much left to make the deal work out. Especially if you have contingencies related to operating or repairing the property. Not surprisingly we’re not shopping for anything today that would involve a mortgage.

Enough about me. What’s the point of this post?

Financing an ongoing business, let alone a startup, is much more complicated because that first number is so hard to come by with any real accuracy, mostly because the future isn’t so predictable. But even when there’s a credible plan in place CEOs don’t often look at it as a calculation of Return on Investment (ROI). More often they focus mostly on:

• Dreams of massive growth that some additional capital will enable them to somehow capture, or
• Getting more money into the company to compensate for being undercapitalized from the start, or
• Compensating for the fact that they’ve pulled too much money out of the company for their personal benefit.

That’s not to say those aren’t understandable reasons for getting more money if it’s needed – even though some better thinking earlier might have precluded the need or at least reduced its size.

The point is that timing is a key element in the decision, and this is not a good time to borrow money. The Federal Reserve is trying to stifle demand by making it much more expensive to do most anything involving borrowed money. Rates at all credible lenders are going up to match the Fed’s inflation-fighting actions, and marginal lenders who serve those that banks won’t are raising rates even faster, with risk protections that are not your friend. Meantime the price of things you will buy with that money is going up also, a double squeeze on your ROI. So if you’re considering taking out a loan to boost your working capital, consider these planning steps:

• First, if you can postpone the need for a year, when we think you’ll be in a much better borrower position.
• Base your calculations on an objectively developed financial plan, complete with reasonable contingencies based on today’s world.
• Make an ROI calculation based on your financial projection as part of your decision making process, and decide if the projected return is worth the risk.
• If you’re eligible, SBA financing can give you some space in interest rate and terms.

How do we know this is the right way to go? That’s how we do it, and…

We are Your CFO for Rent.