Fun with Math, Part I
by Christopher Liechty | October 24, 2013
Admittedly, I love numbers. As a lender, numbers are the focal part of my daily work. A truly huge portion of my day is devoted to numbers.
Numbers tell interesting stories, two of which I’d like to share with you.
A Story of Scale
We speak to contractors daily who pay for the convenience of a credit card financing program. It’s only a 2% net charge, they say, and 2% of a $10,000 job is a measly $200. Pocket change. But $200 has a way of getting bigger in a hurry. If you do only 10 financed jobs of $10,000, that $200 per loan only sums to $2,000 for the year. But what if you do 100 jobs per year (8 per month)? That $200 just grew to $20,000 annually. I could do a lot with $20,000 in my pocket. What if you are a bigger contractor doing 500 jobs per year (42 per month)? Now you are shelling out $100,000 to your lender annually. That’s $100,000 that could have been invested in your business!
A Story of Incentives
For this story, we first have to break down that 2% net charge from the story above. The gross charge is 2.5%, but you receive a rebate of 0.5% from the lender for hitting volume targets. Because the owner understands the value of incentives, you pay the 2.5%, but you give the 0.5% to your finance manager as an incentive to use that lender. Seems like a great structure to get what you want. Now imagine a new lender speaks to your finance manager. They offer to save you the net 2%, but can’t get past hello. Why not? Because the finance manager sees the existing lender as a source of income! The 0.5% goes into the finance manager’s pocket. So, even though switching would be to the company’s advantage, the owner and the finance manager experience the numbers differently. Ouch!
Because I just can’t help myself, I expect to return to the numbers theme regularly. If you have any interesting numbers stories, please share them in the comments or contact us via our website.
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