The interest free loan

I’ve seen this twice in the last couple of weeks now, and it’s exactly the same trick each time, just wearing a different face.

A company owes someone money. Genuine trading debt, work done, invoices raised. And rather than pay it, they just don’t. Not because they can’t. Because they’ve worked out it’s cheaper not to.

Here’s the maths behind it. Say a director needs £50,000, just three months, to fund something he knows will turn a profit. A new contract, a bulk order, a bit of kit that pays for itself fast. Go online for a short-term loan and you’re looking at 2 to 3% a month. Add it up over a year and that’s 24 to 36% interest, plus a setup fee somewhere around three to five grand. Nobody looks at it that way. They look at what they’re going to get back, their profit, not the real annual rate, because the annual rate would frighten them off.

So here’s the alternative some of them find instead. Don’t take the loan. Just don’t pay the £50,000 you already owe someone else for last month’s work. Same fifty grand, same three months roughly, until the profit lands and it gets settled, or doesn’t. No interest, no setup fee, no application, and no permission asked either, because you’ve just taken it. And the person who’s just been quietly turned into their bank is you.

I’ve seen this scaled right up too. One client doing around £100,000 of work a week for a company ended up owed just over a million pounds before anyone called it what it was. That company hadn’t sat down one day and decided to borrow a million pounds off them. Of course they hadn’t. I couldn’t possibly suggest that. But a week here, a month there, and it added up to exactly that.

So here’s the question worth asking yourself today. Look at your own credit terms. How strict are they, really? This never seems to happen to the businesses with a hard line at 30 days. It happens to the ones who let it drift, because the client’s “good for it,” or “a valued relationship,” right up until they’re not.

If you’ve got a client doing this to you right now, that’s exactly the kind of conversation worth having with me before it becomes a habit. And if cash is tight enough that raising the money properly feels genuinely hard, you should call me too. I’ve been up and down that mountain more times than I can count. Why not test me and see how good I actually am? It costs you nothing to find out.

Do you need someone on your side? I’m Mark Smillie.