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New Year, New Loan?

Dec. 19, 2019
Small manufacturers might want to re-assess their options in light of changes in 2019.

It’s that time of year when all of us can benefit from reflecting on how far we’ve come and where we’re headed. For small manufacturers, it’s a process that could make a big difference in performance and profitability in 2020.

As part of a financial year-end check-up, owners should ask themselves some fundamental questions about their vision for the new year and what they need to execute on it. Do you need to hire new employees? Buy equipment? Expand your business premises? Add new product lines or locations? These could all be reasons to contact your bank for additional financing.

Then factor in the bigger picture.  What external factors could negatively impact your business, and how can you protect yourself? For example, how would your business be impacted if interest rates rise in 2020?  

That leads to one of the most important parts of a new-year assessment: Is your current loan still right for your business? Many businesses, especially those on floating interest rate loans, might want to re-examine them in the face of the most recent interest rate cuts.

A small manufacturing company that took out a floating rate loan two years ago would have seen its payments jump earlier this year and then moderate again in the latter part of the year. If that last bump didn’t get you to take action, now may be the time to do so. After all, an increase in payments can be a significant extra burden, crimping companies’ ability to invest for growth.

But the current environment can also represent an opportunity. Seeking out a refinance of your business loans on more attractive terms can put your company on much firmer footing for the coming year and beyond.

Small manufacturers can get complacent with their loans, sticking with them even though their business needs and circumstances may have changed significantly. That’s partly due to a lack of understanding of banks’ decision-making processes and of the differences between conventional financing and Small Business Administration-backed loans.

Because the economy is still strong, and interest rates are near all-time lows, it may be time to consider a debt restructure into more favorable long-term rates, before the pinch of higher rates comes calling again.

If the loan was taken out for a business acquisition, growth capital, or tenant improvements, chances are good the loan was under-secured, and the options for refinancing are going to be limited. In these cases, an SBA loan was probably the financing of choice. Plus, SBA-backed loans generally can’t be refinanced by another SBA loan.

On the other hand, borrowers who financed real estate with an SBA loan and find themselves in appreciating property markets may be able to use that appreciation to refinance into a conventional loan with a fixed or adjustable rate.

One way to do this, while avoiding the often expensive appraisal procedure, is to first ask a local real estate broker to give you an estimated valuation of your property. If you can go to a bank with a valuation in hand showing the property has appreciated by 20-30% in the five years since you took out your SBA loan, you have a good case for pursuing a refinance into a conventional loan.

Whether refinancing or seeking fresh borrowing for business growth, companies should hold out for loans that offer fixed or adjustable rates. A 10-year conventional loan with an adjustment after five years can give you a significant amount of extra protection compared to a floating rate. And yes, some banks offer fixed and adjustable rate SBA loans, too.

To be sure, not all small manufacturers should rush out to seek refinancing. Those only a couple of years into their loans are unlikely to have enough of a track record to make the case for a refinancing.

SBA borrowers who don’t have the advantage of an appreciating asset shouldn’t despair, though. It is still well worth talking to your lender to see if there is any room for an improvement in the terms.

If your company has performed well, and the bank hasn’t sold the loan to investors, it will have more flexibility and has an interest in maintaining a relationship with its client. If the debt has been sold, it could be more difficult.

The best first step is nearly always to approach your current lender to explore the options for a better loan. When looking further afield, bear in mind the trade-off between large national banks and small local banks.

Large banks may offer lower rates but send you to an 800 number for service, while local banks may offer slightly higher rates but provide a more hands-on relationship.

Regardless of where you turn, acting sooner is better than later. While many experts predict the economy will soften in 2020, the interest rate outlook is much less than certain. What is certain is that rates are currently very low.  

Mark Abell is senior vice president and SBA director at NBH Bank, which serves clients through Bank Midwest, Community Banks of Colorado, and Hillcrest Bank. 

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