It’s not always clear whether receiving funding does or doesn’t make sense for your business. When exploring this question, it’s important to remember that it’s not ROI but ROL that counts.
You’re probably familiar with the term ROI (Return on Investment) but you’re probably wondering what ROL means and how it’s different.
What is ROL?
ROL stands for Return on Loan; it’s a phrase that we put together at Fundwise Capital to help our clients better understand whether they should take funding or not. It also helps them know if their business is ready to take that loan in the first place.
How does it work?
To better explain this concept, and what a good ROL is, here is a hypothetical example:
Say you take $50,000 in funding throughout four revolving lines of credit, with an affordable monthly payment. Does it make sense for you take this money? To know the answer to that question we have to see what the results of that loan will be. Let’s say your company makes $100,000 over the next 12 months as a result of the $50,000 in credit lines. Not only are you making enough money to cover those credit lines, you’ve obtained an additional $50,000.
In this example, you’ve doubled your revenue and doubled your ROL. That is a 100% return on loan (ROL) assuming that you paid the other $50,000 back.
These are great numbers, so this deal makes sense. However, we haven’t talked about the cost of obtaining that money; the interest rate.
How does interest impact ROL?
What will this money cost when all is said and done? Is the interest rate too high? Will you still make money when interest is added into the picture?
For most entrepreneurs, who don’t have a big piece of real-estate or a 401K to put up as collateral to get a loan, you’re a lot riskier to banks. Hence, why they might charge you higher interest rates. So what! If you’re still making 100% revenue on the money you borrowed, you’re still making a huge profit.
Let’s got back to the previous example:
We’ll say that that the $50,000 cost you 25% in interest. That seems like an unreasonable amount of interest, but when it comes to business funding with no collateral attached to it, the risk is often balanced by charging this type of interest rate. Now, remember, you’re making $100,000 off of the initial $50,000. After paying back the $50,000 credit and the $12,500 in interest, you still net a profit of $37,500 that your company would not have made otherwise.
This is a winning formula for your business.
With a win at 25% interest, imagine the possibilities with interest at 0% for 9-12 months. This is what can happen when you receive funding through Fundwise Capital. Many of our clients obtain funding at 0% interest for the first year and drastically improve their ROL. A lot of businesses that we work with don’t stop at 100% ROL, many of them walk away with 200-300% on the money they borrow.
Does this funding make sense for my business?
Remember, this isn’t your house mortgage or your car loan. Those types of expenses don’t generate money for you and it is just money out the door. Business debt is different, if you use it the right way, it should make you money. On top of that, you need to remember that this is unsecured lines of credit.
Making sense of your funding can be as easy as taking 2 steps forward:
- Find the best funding that you qualify for
- Run the formula
If you run your funding through the formula and find that it will make you money, then it makes sense.
Remember it’s the not the ROI but the ROL that will help you find wealth and prosperity in your business.