A checklist for comparing a bank offer against a non-bank offer

Put the numbers down first

Illustrative only — $250,000, two structures.

The advance costs $42,870.68 less in total and takes $20,561.06 more out of every month. That pattern — cheaper in dollars, brutal in cash flow — is the normal shape of this comparison, and it is why "which is cheaper" is the wrong opening question.

Now run them against your own cash flow

Illustrative only — put both offers into a business with $180,000 of monthly deposits and $11,000 a month of operating cash flow after everything except debt service.

The bank loan takes $4,022.27 a month. That is covered 2.7 times over and leaves $6,977.73 a month for tax, owner draw and the next van. As a share of deposits it is 2.2%.

The advance takes $5,673.08 a week, which averages $24,583.33 a month. Against $11,000 of operating cash flow that is a shortfall of $13,583.33 every month for a year. As a share of weekly deposits it is 13.7%.

Read that second figure again, because it is the whole comparison. The advance is not a cheaper loan. It is a claim on roughly one dollar in seven of everything that arrives, for twelve months. It only works if the $250,000 generates more than $13,583 a month of new cash flow from the day it lands, or if you are holding reserves you are prepared to spend down on schedule.

Do this arithmetic on the offers in front of you before you read another word of either contract. Most of what follows only matters for the offers that survive it.

The checklist

How to use it

Run the affordability test before the cost test — see total cost of capital versus payment affordability. Then price the offers that survive it with the calculators, and read the last four checklist items in the documents rather than from the summary sheet. That is where the two products actually differ.

The structure nobody puts on a checklist

Sometimes the honest answer is one of each: the bank facility for the permanent need, on the bank's timetable, and something smaller and faster for the part that genuinely cannot wait.

Two cautions if you go that way. Most non-bank agreements prohibit additional financing secured by or repaid from the same receipts, and most bank loan agreements limit additional debt. Taking the second facility can breach the first in either direction, so read both negative covenant clauses before you sign either document. And sequence changes the outcome: a daily debit already running across your bank statements changes how a credit officer reads the same file three weeks later.

Five questions that separate the two documents

1. To the bank: which covenant would I breach first on my own numbers, and how much headroom do I have today? A covenant you would trip in month seven is a maturity date wearing a disguise.
2. To the non-bank funder: is reconciliation a right or a courtesy? What exactly do I send, to whom, by when, and what is the turnaround. Get the answer in the contract, not in an email.
3. To both: what does it cost to be out at month six? On one side that is a prepayment calculation you can verify. On the other it is whatever discount is discretionary on the day, which is not a number you can plan around.
4. To both: what lien will you file, over what, and what is your termination process once I have paid? An uncleared filing is the most common avoidable obstacle in the next financing.
5. To both: who services this after funding, and can the file be sold? The counterparty you negotiated with is not always the counterparty you deal with in month nine.

Write the answers on the same page as the two sets of numbers. The offer that looks better on a summary sheet and worse on that page is the one that was designed to be read quickly.