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Refinancing lets a business cut debt, improve cash flow

Now that interest rates have dropped, you might be able to cut your business costs by refinancing your company's loan.

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.

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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 leap
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 of interest.
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 money
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 situation.

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 SBA 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.

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