The Federal Reserve just raised its benchmark interest rate for the second time in three months. And it’s bound to go higher this year. So, how heavy is your company’s debt load? And will it grow heavier as your fluctuating interest rate climbs higher? This may be a good time to see where you stand with an eye to positioning your balance sheet for the remainder of 2017 and beyond.
There are plenty of other things to consider; inventory, employees, seasonal variations in business, competitors and taxes. You may want to expand and grow the business. You may even want to put it in shape to sell.
But your outgoing debt payments may be the elephant in the room. How much do you pay out each month on your principal and interest? How do these out flows affect your ability to pay your other expenses? And are you able to retain enough cash on hand? You must decide how much debt is too much and react before your repayment burden pulls your company under or restricts your future plans.
The certainty of further interest rate increases may make a big difference in your monthly loan repayments.
Do I have your attention?
You might want to consider securing a fixed rate on some of your existing debt by consolidating existing loans and establishing a new payment schedule. Right now, most of your current commercial financing is probably tied to a floating interest rate and your payment is likely to fluctuate periodically. The obvious advantage of a fixed-rate loan is that the payment will never change from month-to-month, making it easier to plan your budget. Another advantage to consolidating is that you may be able to reduce your monthly debt payments. And, your loan could be structured to give you access to your equity for business expenses.
Not every loan program or refinancing option offers fixed-rate financing. Here’s one that does; the 504 loan program from the U.S. Small Business Administration. SBA 504 loans have been around for more than 30 years, but they haven’t always been able to refinance existing debt, so a lot of people are unaware they can even go this route.
The SBA 504’s refi option can consolidate your conventional, commercial business financing, but not existing SBA loans. That is, most existing commercial debt is eligible for a 504 refi loan. If your outstanding commercial loans meet the following criteria, they may be eligible for refinancing with a fixed-rate 504 loan:
Loan at least two years old and current for the last 12 months;
At least 85% of the loan proceeds must have been used for real estate, construction or to purchase equipment (these are criteria for a 504 loan);
You must occupy at least 51% of the property you are refinancing.
If these criteria describe your debt, you should call your business banker to determine if you are eligible for SBA 504 refinancing, and if this refi option will help stabilize your company’s budget.
There’s something in it for your banker, as well. The refi program is a powerful tool in the bank’s business loan portfolio. The loan’s structure protects the bank…thus encouraging the bank to offer the refi program to borrowers such as you.
This conversation between you and your banker could be one of the most important of your business year. Your company’s financial health affects your livelihood, and everyone who works for you.
Jean Wojtowicz is president of Cambridge Capital Management Corp.