Some say “Capital is a commodity.  Lowest price wins.”  If 8% interest is good, 0% must be even better.  You have heard the auto industry talk about “0% or $5,000 cash back”; what could be better than getting paid to borrow something you do not have enough money to buy with cash?  You know instinctively that this is all bunk yet we all can not help but frame things to do with financing in terms of “interest”.  Everyone asks “What is the interest rate?” yet what many borrowers really want to discover from the capital markets is:  “How much risk will you take?”

I am going to share a real case with you.  A founder hired a CFO as his business began to grow significantly.  He told the incoming CFO he had negotiated a lease line that had an 8% interest rate just prior to the CFO joining.  The CFO called us and asked if we wanted to lease at 8%.  I said “if 8% is good, how does 0% sound?” and immediately explained that the question is really “What is really important to you?  What are you solving for?”  I went on to ask, “Is it to say that you are paying the lowest interest rate?  Is it the lowest monthly payment?  Is it to have the most total cash available?  Is it to have the fewest financial restrictions or is it to know with certainty what the total cost of financing will be for the use of the equipment over the useful life of the asset?”

He was honest enough to say he had not considered these dimensions of the business decision and admitted that his company would be selling equity in a month or two.  The CFO then took time to prioritize.  What do you think he decided to do – minimize his total cost of financing or maximize his cash runway?

Tags: behavior, capital, cfo, credit, equipment leasing, founder, venture capital, venture debt, venture leasing