By Stephen Barnett

Business owners who are scrutinizing expenses to make sure their operations are lean and efficient should consider reducing cash outflow by refinancing debt. Whether it’s a mortgage, term loan, equipment loan, or any long-term credit facility with a periodic fixed payment, it may be possible to negotiate with a bank (or non-bank lender) to revise current debt structure, given historically low-interest rates, with the intent of reducing the periodic payments.

The two principal components of determining periodic payments on a loan are the interest rate and amortization period.  Revising one or both can result in a lower periodic payment and, therefore, a reduction in cash outflow.

When looking to restructure debt, a borrower’s options include a complete refinance or modification of the current debt terms.  The former is typically more costly than the latter, but payment savings over the long run could make a complete refinance worthwhile.

Banks may be reluctant to refinance or modify existing loans due to economic uncertainty and a reduction in business income and profitability.  It is, however, worth asking for loan revisions, especially if the business has been a valued client of the bank.  The argument can be made that a new or modified loan having lower payments puts the business in a more viable financial position to “ride out” an economic downturn, experience a more successful recovery, and continue to be an acceptable credit risk.

To some extent, banks have recognized the need to provide temporary relief by allowing businesses to defer payments for a time. But it must be noted that complete reimbursement of deferred payments could have a detrimental effect on business recovery in the long run.   For the most part, banks are interested in keeping their good customers happy and helping the bank’s customers maintain viable businesses is mutually beneficial.

Getting to Yes

Presentation is 90% of “getting to yes” with a bank, yet most businesses don’t take the time to properly prepare.  Before approaching the lender, business owners should think through the right “ask” and create a game plan for success.

  1. Start by analyzing financial statements to have a clear understanding of the challenges the business is facing.  Develop a clear, concise request for assistance and have a command of the details to present to the bank.
  2. Be prepared to communicate the arc of the business – past, present, and future. Explain your business model, prove the strength of the business before the slow down, and demonstrate how payroll cuts and other expense reductions have minimized losses and cash outflow.
  3. Share projections for future profitability building on past success. Include commitments of future contracts and show the strength of vendor, employee, and customer relationships to prove the optimistic business projections. More detail increases the likelihood of success.
  4. Explain the need for enhanced cash flow to bridge the business back to good health.
  5. One should first turn to its existing bank with the refinancing request.  Depending on the bank, borrower, and their relationship, banks can provide flexible solutions to improve or extend terms.  If not successful, seek another bank that may be receptive as an alternative.

Using this process to pursue loan refinancing or modifications of existing debt can serve as a foundation to create a financial strategic plan that also takes advantage of low interest rates.

Difficult economic times put banking relationships to the test. Naturally conservative bankers are reluctant to modify loans for struggling businesses without demonstrable improvements in cash flow. With the right amount of “bank speak” and knowing what is possible, an educated business owner or professional can make the case that modifying or refinancing a loan makes the business a better credit risk for the bank.

Stephen Barnett, Daszkal BoltonAbout the Author

Stephen Barnett helps business owners and entrepreneurs with financial strategy and obtaining business financing. He previously served as President/CEO of two commercial banks and held senior positions at other banks.

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