Call it leverage. Call it borrowing. Call it debt. All ways of saying that you got a loan to help your business grow (or, in 2020, to survive). This is not the free debt you get from delaying paying your bills, this is: go to the bank, ask for money, agree to pay interest on that money and to pay it back at some point. Virtually every business needs leverage at one time or another to take advantage of opportunities or to acquire the assets your business needs to operate effectively. To a point.
Some years ago we were engaged by a new client in Texas to guide the growth of their CFO as the company grew. One of the firsts things we noticed was the borrowed money, mostly to buy real estate, at interest rates that had not been renegotiated in several years, despite the (then) historically low rates that were available. We saved that company several hundred thousand dollars over the term of those loans by getting them to recompete those loans and lower the interest rates. And the winning lender was – their existing lender, who didn’t want to lose the business.
This year I took that strategy to my personal real estate loan portfolio and have gotten rates lowered on two properties – two more in process – by simply asking the lender to consider it before I looked elsewhere for a refinance. None of the lenders refused, because they wanted to keep the business, knowing that other lenders would gladly refinance those loans.
Recently we were engaged by a small but growing company who had survival loans on their books at double digit rates from a financing source that thrives on advertising ease and speed and generous terms, as long as you’re willing to pay whatever rates they ask. Inadequate financial reporting helped to keep the real impact of that lending from shocking borrowers into a refinance.
So what’s the point? Obviously it’s about holding onto today’s (again) historically low rates by looking at your own lending to see where a refinance, or a simple request, can get you a lower cost for the balance of the life of your loan. Even a single percent reduction can produce thousands of dollars in savings over the remaining term, but the bank is not going to call you and ask if you want to pay them less. The action has to come from you. So get borrowed money when you need it. But get it at a reasonable price as that is defined over time. And today, reasonable is LOW. Check out my blog from a couple weeks ago on yield curve to better understand how this can change, and then get busy.
We are Your CFO for Rent.