Is it time to review your company’s debt portfolio?
Business owners and leaders typically put in more than their fair share of hours to guide their companies to success. They’re also focused on making the most of the rewards they receive for that hard work. This time of year, many take time to study and adjust their personal investment portfolios.
There’s another type of portfolio savvy business owners and leaders should eye just as closely. That’s the portfolio of loans and other types of credit companies accumulate to help them achieve strategic goals and smooth out variations in their finances.
Many businesses wind up accumulating their own portfolio of loans over time. In addition to familiar types of loans such as mortgages on facilities or installment loans on vehicles, a company’s debt portfolio might include business (and sometimes personal) credit cards, financing on equipment used in the business, and leases.
Those forms of debt have different purposes and amounts, as well as unique terms and payment structures. While the funds associated with this debt are owed to other organizations, they essentially represent investments in the future of the business. The company’s return on those investments comes in the form of growth and the financial stability careful use of debt can foster.
That’s why a company’s debt portfolio can play a crucial role in business. However, if it’s not managed thoughtfully, that portfolio can become tricky and even dangerous, especially when different divisions or locations enter into borrowing agreements on their own.
While you might assume leadership is always aware of all the types of debts the company owes, that may not be the case, especially in a fast-growing or complex organization. When the Marion location finances the purchase of a new desktop computer for an administrative assistant, the Winamac branch signs a lease for a new pickup truck, and the Seymour warehouse opens a credit account with its HVAC contractor to replace an air handler, they may not have needed management’s permission – but have all contributed to the company’s overall debt portfolio.
When company leaders regularly review the obligations their team has made, they’re less likely to be surprised by something like an unexpected balloon payment or a hefty fee for exceeding the mileage on a vehicle lease. Regular loan portfolio reviews also deliver insight into how well the company is doing. Leaders can see whether their portfolio will likely be larger in a year, or whether it’s shrinking. Looking at the interest rates they’re paying allows them to more accurately forecast financial performance and may call attention to opportunities to shift debts or accelerate repayment or consider refinancing of a particular loan. If the total amount of debt is increasing, but there isn’t a corresponding jump in revenues, it signals a need to look deeper to see whether something in the economy is creating a problem or adjustments need to be made.
Simply put, performing those regular reviews minimizes the potential for unpleasant surprises. That’s why I recommend every company conduct formal reviews of debt regularly.
When you better understand the nature and scope of what your company owes, you may be able to make strategic decisions that put you in a better position. Your Marion manager didn’t pay much attention to the 19 percent interest rate the computer maker charged, an outright purchase of the Winamac vehicle would probably have been cheaper in the long run than the lease, and that balance from the Seymour warehouse costs 22 percent.
If you had instead used your company’s line of credit or obtained a bank loan to handle all those purchases, you may have been able to borrow everything needed for something closer to 9 percent, dramatically cutting your interest expense. That would also simplify the process of servicing that debt — you’d make one payment instead of several – and it makes it less likely one of your locations might miss a payment and impact the company’s credit rating.
Plus, if you review your debt portfolio with the help of a trusted commercial banker, they may be able to identify other strategies to help you reduce interest expense and improve your control over what your company borrows. Good bankers are more than a friendly source of funds – they can also be a valuable source of knowledge to help your company thrive!
Karen Gregerson is President & CEO of The Farmers Bank, a locally owned and operating bank with 11 banking offices in Central Indiana.