It’s mid-November and your company should be well underway with its planning and budgets for next year. As you review your numbers, do you think your projected earnings could use a boost? Could you grow faster if you had more money? Well, there is a fairly straightforward solution that will help you achieve one or both of those goals. The solution is to refinance your bank debt.
To start the refinance process, you need to know which lenders to approach. You may know a few lenders who have called on your company in the past, but they might not be the best lenders for your company. One thing most business owners don’t realize is that not all banks/lenders are the same. Yes, they all have money they want to lend, but the culture, motivations, regulations, people, and portfolios differ from one bank to the other and even within different divisions of the same bank. Certain lenders get very aggressive on equipment and real estate loans while others prefer accounts receivable and inventory lending. Similarly, certain banks prefer lending for owner-occupied real estate while others are only interested in multi-tenant commercial real estate. There are also specialty lenders who understand and lend against risks in certain industries such as microbreweries, metals companies, technology companies, and healthcare companies. So the first step is to identify a group of appropriate lenders with which to share the lending opportunity. Waypoint Private Capital has extensive relationships with lenders throughout the country and can help you identify the appropriate group.
After the opportunity has been shared with the group of lenders selected, you will want to have phone calls, meetings, and tours with the interested lenders to make sure they are comfortable with the opportunity. Then ask them to submit initial proposals. When reviewing these proposals, focus on interest rates, advance rates, and amortization periods because they directly impact earnings and cash flow. Initial proposals from lenders will generally be based on what that lender considers to be market rates, which they then adjust up or down to reflect their perceived risk for the loan and how badly they want to make the loan. Lenders will naturally propose higher rates if they think they are the only lender you are talking to. However, if they know they are in a competitive situation they will get more aggressive with the rates. Waypoint recently secured a two percent (200 basis point) interest rate decrease for a client by identifying the most appropriate lenders and creating a competitive situation for the loan which allowed us to negotiate from a position of strength. The interest rate savings on that $18 million loan will result in a meaningful annual increase of $360,000 in earnings and cash flow for our client.
Beyond interest rates, another important loan term is the advance rate being proposed by the lender. Advance rates can vary significantly by lender for each type of loan. As an example, accounts receivable advance rates often range from 70% to 85%. On a $4 million accounts receivable balance, that results in a difference of $600,000 in loan availability. Other asset types have similar variances. Once again, advance rates offered depend on the type of lender and how interested they are in the loan. The advance rates have a direct impact on cash flow.
The next most important feature of a loan is the amortization period. While some lenders indicate they have little flexibility in altering the amortization period for a loan, others have great flexibility and are willing to extend amortization periods to win the business. Extending the amortization period on a loan can have a significant positive impact on cash flow that can be redirected to support growth initiatives. For example, extending the amortization period from five to seven years on an equipment loan will result in a cash flow savings of $57,000 per year for each $1 million of borrowing. So if you apply that cash savings to a $3 million equipment loan, the $171,000 cash savings could support the hiring of two to three additional sales people whose efforts could lead to significant growth at the company.
There are many other important items to review and negotiate when refinancing loans, including covenants, fees, and ongoing monitoring requirements. However, interest rates, advance rates, and amortization periods have the most direct impact on increasing earnings and cash flow. Waypoint works with clients across the country to help prepare the offering materials, select the best lenders, and negotiate the loan terms that best satisfy the needs of our clients. By creating a market for the loan, we ensure that our clients find a lender that is a good fit for their company and offers competitive interest rates, advance rates, amortization periods, and other relevant terms. These terms all have an impact on earnings and cash flow and can help you achieve the best possible results for your company.