Make Sure to Cover All Bases When Planning to Refinance

You’ve no doubt heard all about the credit crunch. Maybe you’ve even seen it in action, making it difficult if not impossible for many to get loans.

The best solution is to avoid carrying any debt in the first place. But if you’re not among those lucky enough to be in that situation, there can be a silver lining to all this.
Interest rates are at historic lows. So if you have debt and can qualify for a new loan, it’s probably a good time to consider refinancing some of your long-term debt. Apart from that, you might have to renew your debt anyway.
Business owners should focus on seven key factors in order to get a new loan at terms that work for them, according to Don Feldmann, president of Cincinnati-based investment banking and mergers and acquisitions advisory firm Winton Associates Inc.

  •  Look ahead in determining your needs. Start by discussing with your lender what you expect from your business and your finances during the next 12 months. Make sure the lender is aware if you think you’ll need money for capital spending within the next several months. If you don’t let your banker or other lender know that ahead of time, when the time comes that you do need the money, you’ll look like that need caught you by surprise. Even worse, lenders might think you were intentionally misleading them in failing to mention that capital need beforehand.
  •  Be aware of the bank’s side of things. Know what the bank needs in order to make a loan. This will help you avoid asking for terms that banks simply won’t provide, especially in the current lending environment. Lenders won’t go for unsecured loans or offering terms with very few covenants attached in this market. Bypassing the unreasonable requests allows you to focus on coming up with terms they can offer that are also amenable to you. Once you can figure out where the lender is coming from, it’s a lot easier to reach a deal that works for both sides.
  •  Steer clear of surprises. Lenders don’t like to be caught off-guard. Sure, some surprises can’t be helped. But the more advance warning you can provide to bankers that events – whether good or bad – are about to impact your business, the better off you’ll be and the better your relationships with your lender will be. Just as you want to know if something will impact your ability to collect receivables, keep your lender apprised of any circumstances that impact your situation or near-future borrowing needs.
  • Focus on the impact. Banks might put in loan requirements that they don’t realize will cause a negative effect on your business. You have to let them know that and see if there’s another workable solution. But be aware that the banks have their own needs for protection, too.
  • Set priorities in negotiating. The current market environment has changed the bargaining stance of many borrowers. Plenty of companies had a much stronger negotiating position in the past than they might have now. This doesn’t mean the ball is solely in the lender’s court, but it helps to be aware you might not have the same bargaining chips that you used to have. What’s standard for banks now might seem excessive compared with the last time you went in for a loan. Outline your priorities in the deal and determine which ones are workable with the bank. Work those out and you’ll have a better deal for yourself.
  • Create a cushion. The more time you have before renewing a loan, the better off you are. Start discussing it with your lender as far in advance as you can. Banks are giving more scrutiny to loan requests and renewals than in the past, which slows the process.  This makes advance planning paramount. The more lead time you can provide to the lender, the better chance you have of getting your money when you need it.
  • Bring in some expertise. A specialist in financing and lending will know what banks or other lenders want and what their priorities are. Such experts should be able to save you more than what you pay them in fees. It also doesn’t hurt to have someone else who knows what they’re doing present when you’re meeting with lenders. Sometimes you might not understand something a lender wants. The expert can help you wade through the terminology.

The current economy certainly makes it more of a challenge when going to refinance or renew a loan, let alone when seeking new financing. The pendulum has swung to give the lenders the advantage where the borrowers had the edge in the past. But planning ahead and knowing what the lender’s needs are can help you get a deal that still works for your business.

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