How to compare two offers with different structures on a single page

The five figures

Whatever the pricing convention, every financing offer answers the same five questions. Put them in a column for each offer and the comparison is done.

1. Cash received. Amount funded minus everything deducted at funding.
2. Total of all payments. Every scheduled payment, added up.
3. Cost. Total payments minus cash received.
4. Outflow per month. Weekly payment x 52 / 12. Daily payment x 21. Monthly payment as it stands.
5. Time to clear. In months, so the two are on the same clock.

Then one derived figure, computed the same way for both: the annualised rate, obtained by solving for the periodic rate that makes the payments equal the cash received and multiplying by the number of periods in a year.

Two offers, filled in

Illustrative only — a business needs $120,000.

What the page says

B costs $5,959.68 less in total dollars. Per dollar of cash received, B costs 27.84 cents and A costs 32.62 cents. On dollars, B wins.

B's annualised rate is 65.3% against A's 14.6%. On rate, A wins by a mile.

Both statements are true, and neither is a mistake. Dollars and rates measure different things: B is expensive per unit of time and cheap in total because it is outstanding for a fifth as long. If you want the cheapest capital measured in dollars, that is B. If you want the cheapest capital measured in what it charges for the use of money, that is A.

The figure that decides it is the fourth one. B demands $16,120 a month, A demands $3,249.16. Compute your free cash flow, and one of these two offers is very probably not available to you at any price. See total cost of capital versus payment affordability.

What can be normalised

• Cash received, once you have the full fee list in dollars.
• Total payments, once the schedule is in writing.
• Cost, which is just the difference.
• Monthly-equivalent outflow, using 52/12 for weekly and 21 for daily.
• The annualised rate, provided you use the same method and the same basis on both, and say which.

What cannot

The third shape: a revolver

A line of credit does not fit the five-figure table, and forcing it in produces nonsense.

There is no fixed total of payments, because the total depends on how much you draw and how long you hold it. Illustrative only — $120,000 drawn on a line at a stated 14.5% and repaid after five months costs about $7,250. The same $120,000 held eleven months costs about $15,950. Same facility, same rate, two different transactions, and neither is knowable on the day you sign.

Compare a revolver on different rows: the stated rate and its index, the day-count basis, any per-draw fee, the unused-line fee, the annual or renewal fee, and the covenants — because covenants are what can take the facility away from you. Then model it against your actual usage pattern rather than a single drawn amount. A line used for eighteen days at a time is priced almost entirely by fees; a line drawn and held is priced by the rate.

The honest comparison against a fixed-total product is not rate against rate. It is: what will this cost over the next twelve months given how I will actually use it, and will it still be there in month thirteen.

The fees to ask for by name

A fee list is rarely complete unless you name the items. Ask in writing for the dollar amount of each of these, or confirmation that it is zero.

• Origination, underwriting, processing, documentation and closing
• Broker or referral compensation, and whether it comes out of your proceeds
• ACH or payment processing charges, per payment
• NSF, returned item and late fees, with the amount per event
• Monthly or annual servicing or maintenance
• UCC filing and lien search costs
• Termination, prepayment or early-payoff charges
• Renewal or modification fees
• The default rate or default fee, and exactly what triggers it

Anything not on that list in writing is not in your cash-received figure, which means the first row of the table is wrong and every row derived from it is wrong too.

The page itself

Two columns, eleven rows: the five figures, the annualised rate, the security terms, the reconciliation right, the early-payoff position, the fee list total, and the date the quote expires.

Fill it in from documents rather than conversations. If a row cannot be filled because the funder will not put it in writing, leave the cell empty and note that it is empty — an empty cell in the security row is a finding, not a gap. The calculators will produce the numeric rows from the inputs you have; the last four rows are reading, and they are where the decision usually turns out to have been.