Knowing Your Loan Options
One of the main problems that an annual debt review can help solve is that it forces a business owner to consider other loan options he or she may not have without the review. If what is found in the review isn’t favorable, the business owner is likely to see if there are other options. Oftentimes, it takes bad news to spark a change. I wouldn’t be surprised if there are millions of business owners in more expensive financing arrangements then they need to be. When a business first seeks capital, it may need to enter into a financing arrangement that isn’t ideal for the business simply to get the ball rolling. If a business doesn’t qualify for a traditional bank loan or a U.S. Small Business Administration (SBA)–backed loan, the other options will likely come with a higher interest rate and shorter amortization period. However, as the business grows, pays back its initial loan, and starts to generate a steady cash flow while building business credit, the business should certainly look for a better loan program. I like to call this the “path back to bankability.” As a business grows, it’s likely that its loan options will become more appealing because the business is generating the necessary collateral, credit, and cash flow to qualify for a better loan. Year after year, businesses evolve. Don’t get stuck in the trap of doing the same old thing because it’s convenient or too time consuming to seek out better options. Use the annual debt review to really dive into your current loans and see if there’s a chance to restructure by considering all of your options at that moment.
Getting Out of the Trap
Up until this point, you may be thinking that restructuring your current loans into more attractive loan programs is a no-brainer and easily done. However, that’s not necessarily the case. While the decision might be an easy one to make for you, your lender might not be so quick to let go. I remember working with a business owner on a debt review and restructuring about a year ago. He brought concerns to the table from his lender, who had told him that all kinds of bad things would happen in his business if he changed financiers. In my opinion, his lender was simply trying to scare the business owner into thinking that he risked running out of money and losing the ability to finance his business if he changed lenders. In this situation, it was my best guess that the lender just didn’t want to lose the 40% to 50% interest it had been collecting from the small business owner for years. Getting out of the expensive financing trap may cause you to hit a few snags along the way, but it’s well worth it in the end. In the case of the small business owner I was working with last year, he ended up cutting the cost of his capital by 50% by getting out of that financing arrangement with the scare-tactic lender and, instead, switching to the SBA’s recently revamped CAPLines program. Knowing your options can help your business save money and get out of the debt trap faster. With an annual review, you can look into your current lending agreements and see if there’s room for improvement. You may be able to save your business money in the year to come if your business has graduated to the next level of financing.