In Your Best Interest - Are You Taking Advantage of the Low Rates?

Today's interest rates are near to a record low--and who knows what will happen next? Don't wait around to see. Be sure you are taking full advantage of this current lending largesse, and shop wisely among the lending institutions and options that are available to business owners.

FINANCING DECISIONS

Is refinancing the right move for your business? Should you consider consolidating loans? Take a look at a few of the pros and cons generated by the current economic climate.

Paying Now vs. Later

Let's begin with the basics: your accounts payable. Are you aware of the relative savings that can be effected by prompt payment? The standard among most suppliers is a two percent discount for payment within ten days (as opposed to net for 30 days). If you plead cash flow problems as the excuse for failing to take advantage of these discounts, and--worse--for allowing interest charges to accrue, a reassessment may be in order. Why? The difference between the interest businesses pay suppliers annually (14 percent and more) and what they would be charged by a bank (7 to 8 percent) is too significant to ignore. With interest rates where they are today, this is a gap well worth bridging.

Leasing vs. Buying 

Equipment leasing has become a standard fixture of the small to mid-sized business. Are you sure this is still the best tactic, viewed long-term? Do a thorough review of what your business is paying for the lease of equipment. Most likely, you'll find that these costs--based on non-current interest rates of 20 percent and upwards--have not dropped to match today's bank rates. Explore the possibility of buying out these leases with "better-priced" money from a lending institution.

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Retiring Term Loan Debt vs. Refinancing

Since some term loans have stiff prepayment penalties, the feasibility of retiring the debt becomes a tricky debate. You might be able to convince your bank (or other lending institution) that you deserve to be let off the penalty; failing that, you could negotiate for refinancing. However, before you let yourself in for the paperwork headaches of refinancing, do your "math"--and, of course, consult your business advisors--to be sure that this is the wisest move. And, should you be stuck with a penalty, calculate the consequences (divide the penalty by the monthly savings you would make on loan payments) to get the right fix on your best course of action.

Consolidation: Time vs. Money

Sometimes you have to spend the time to save the money! Consolidating loans, extending maturities, and, in general, repackaging the debt of your business are time-consuming processes. However, with low interest rates on your side, any or all of them can make a lot of sense. Just be sure to consult your financial and tax advisors to help you with your financing decisions. And once you've done your homework, don't hesitate: step right up, while the rates are down.

BUSINESS LOAN SOURCES

Every business needs capital to help it grow successfully. With the current low interest rates in place, now is the time to investigate the best sources for fresh capital to recharge your business.

Asset-Based Lenders

If your business has marketable assets against which you can borrow, ABLs are one of your best refinancing sources. These institutions, typically, will lend up to 85 percent of eligible receivables, 50 percent of inventory, and from 75 to 80 percent of the liquidation value of equipment.

Credit Unions

This source may come as a surprise to business owners, since such institutions are usually thought of as lenders to the individual consumer. However, credit unions (defined as not-for-profit, member-owned lending institutions) have lately been expanding the number of loans made to their union members for business purposes. To qualify, you must first become a member of the credit union from which you plan to borrow; then you must go through steps similar to those required by a traditional commercial institution.

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Finance Companies

If capital is needed over and above the value of a business's assets, finance companies are a choice to consider. More and more finance companies, traditionally considered lenders to individuals, are now providing business loans. Many of them are strong SBA lenders, and they are worth talking to. However, these lenders may demand participation in the projected growth of business--as a compensation for providing loans without the backing of assets.

Insurance Companies

This is perhaps the least viable option for small to medium-sized businesses because of their conservative approach to lending. However, insurance companies, as a rule, offer long-term fixed-rate loans, and, since long-term rates have dropped to their lowest levels in years, this might be a good option for some businesses. Another advantage offered by this lending source is that maturities can extend as long as 20 years, often calling for no payment of principal for five years or more.

Small Business Administration (SBA)

SBA's relatively new guaranteed loan program is designed specifically to help the small to mid-sized business access capital. Here's how it works: the SBA guarantees up to 90 percent of a business loan provided by a bank or other lender. With this guarantee, the lending institution has the ability to sell off the 90 percent portion at a profit, service the loan for a fee, and be responsible for only the ten percent remaining (in most cases, this will be the borrower's collateral). Since accessing financing is often a challenge for businesses, the advantages of having SBA "sweeten the pot" for banks are obvious.

Commercial Banks

Most commercial banks will eschew equity in favor of points or finance fees. Typically, banks will offer a working capital loan, to be secured by the business's assets and scheduled to mature anytime from three to five years. In a similar fashion to ABLs, commercial banks also handle larger term loans (with maturities of five to seven years) that must be supported by all business assets. An added note: whatever route you eventually take for obtaining business loans, don't overlook your own bank when it comes to refinancing. Having your bank involved, even at a minor level, will aid your credibility with other lending sources by demonstrating stability and continuity.

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