Refinancing lets a business cut debt, improve cash
Now that interest rates have dropped,
you might be able to cut your business costs by refinancing your
Angelo Mitroussias, senior vice president and chief
lending officer for Village Bank & Trust in Arlington Heights,
Ill., is a former truck-stop owner turned banker. He says he would
consider refinancing a business loan in a "New York minute"
if he could save 1 full point, after subtracting any related costs.
The typical small-business borrower at his bank carries
$250,000 or so in debt, a combination of a mortgage and a term loan
or a line of credit. Shaving 1 percent off the interest rate can
make a sizable difference each month, with the exact savings dependent
on the length and structure of the loans.
But before you rush to the bank, remember that a business
loan is a completely different animal from a conventional, easily
refinanced, 30-year home mortgage. A house is a commodity, and the
market in them is liquid.
Business loans are relationship-based. The bank is
betting on a business borrower's ability to run his operation profitably.
Anytime you tinker with the business or the lending agreement, you'll
have to persuade your lender all over again that you and your business
are good for the money.
Look before making a refi
Here are six questions you'll need to answer if you are considering
seeking a better business rate, either from your current financier
or another lending institution offering lower rates:
1. How's your payment record?
This is a key question. If you haven't been a model customer,
it probably isn't going to do you any good to ask your lender
for a better rate.
2. How's business? Mitroussias
says he prefers that customers seeking to refinance a loan be
able to demonstrate that their annual net cash flow is twice what
they owe annually in principal, interest and fees, but he will
consider working with a business whose net is as low as 110 percent
of what they must pay in debt service. In calculating that number,
be sure to add back in the interest paid on the debt and any depreciation
figured on a property.
3. Do you like your banker? Even
in business, money isn't everything. An understanding, flexible
banking relationship can be worth lots more than a point or two
4. What are the penalty points?
Sometimes a deal doesn't look as good after you add up everything.
Before they give a small business a loan, some banks will want
the owner to move all his business over to their bank, possibly
including personal assets. Review all the rates and all the demands
before you make any changes.
5. How much blood does the lender demand?
Most lenders want a personal guarantee from any owner of more
than 20 percent of a small business. But if they want to actually
hold personal collateral -- like stocks, bonds or real estate
-- run the other way.
6. How complicated is the move?
If the new banker wants a full, certified audit instead of internal
financials, your savings could evaporate.
Sealing the lower-cost deal
If after looking over the deal, you decide to go for it, your next
step is persuading the lender that your business is worthy.
Ray Silverstein, president of President
Resource Organization, a nationwide, small-business consulting
company, recommends you put together a business plan that includes:
- An executive summary of the
benefits to the bank for lending your company money. Keep it short
and to the point, but make it clear that refinancing will result
in improved cash flow. That is a worthy goal.
- Details of your collateral. Demonstrate why it
is worth more -- if it is -- than it was when you applied for
the original loan. This puts you in a stronger borrowing position.
- A one- or two-page history of the company that
points not only to your company's strengths. It should also highlight
the strengths of the market in which you do business. This supports
the potential for stable or improved sales and profitability.
- Details of upcoming projects, including the dates
over the next two or three years when you expect to complete them.
Show how these projects will improve cash flow.
- Three years of financials or tax returns, or a
combination of both.
- Brief bios of your management team. Having strong
people in place is persuasive.
Separating business and personal
If you are still at the stage where you are financing your business
out of your personal assets with a personal line of credit or your
credit card, now is clearly the time to do something about this
Silverstein recommends exploring the options offered
by the Small
Business Administration, including the 7(a)
and the Microloan
programs. The Microloan option handles loans up to $35,000.
Mitroussias is particularly enthusiastic about the
504 program. Its guarantee allows his bank to give a small-business
owner interested in purchasing real estate a fixed-rate, long-term
(up to 20 years) loan with only 10 percent down. Plus, the borrower
can factor in building improvements, including equipment costs.
The purchaser has to occupy 51 percent of the building
and, unfortunately, the 504 program won't allow refinancing of old
debt. But Mitroussias thinks it's a good enough deal that even businesses
already owning property should take a look.
Jennie L. Phipps is a contributing
editor based in Michigan.