Posted: February 22, 2011
A refi for your small business could be good business
Refinancing could open the door to new opportunitiesEric Craine
Many small businesses in Colorado have done an incredible job managing their business through a tough economy. They spent the past two years hunkered down making tough decisions. They kept a keen eye on managing what they had to pay versus what they wanted. They reduced inventory levels. They guarded their cash. They honed their management practices to be more nimble and quick. Small businesses have stayed alert and ready as they waited for the glimmer of economic hope that may have finally appeared on the horizon.
For the first time since 2008, small business owners are showing a more optimistic view about their cash flow, capital spending, and revenues. And now, as economic indicators point toward a recovery, now is the time to turn that glimmer of hope into a spark of opportunity.
The first step toward opportunity starts with a critical look at the balance sheet, and especially how debt-credit cards, equipment loans, and mortgage obligations-can be restructured.
Look at Loans and Leases
Interest rates are at historic lows, but that does not necessarily mean small business owners should refinance their business mortgages. While equipment costs remained relatively flat, real estate values have not weathered the storm as well. Now may or may not be a good time to refinance for those who already own. Now may be a good time to buy versus lease.
For those who currently own, if you have more than 20 percent equity in their property compared to debt, interest rates are working in their favor to refinance. If there is excess equity in the property, now may be a good time to consolidate some short-term, working capital debt into a long-term amortization. This will enable owners to have new working capital available to expand their business.
However, that equity position may have changed in the last two years based upon when the property was purchased and how the market has affected its value.
For instance, a commercial property may have been purchased three years ago in Colorado for $1 million at 6.5 percent interest rate. With an average decline of commercial property values around 13 percent, today's market puts the value of that commercial building at $870,000. If enough equity was not compiled to counter the devaluation and brought the loan-to-value ratio back up to 80 percent, refinancing may not be an available solution. Possible options: pay down the principal to 80 percent loan-to-value or make up the difference with cash before refinancing.
Lower property values are not all bad news. If buying a building is in the business growth plan, now may be the time to fast track purchasing plans. Low interest rates, affordable property, and a strong company financial condition could help owners acquire more property than they may have been able to afford a couple of years ago.
So what happens if owners are not in a position to refinance and/or consolidate debt? The same logic that works for personal debt applies to business debt: make the minimum payments on all debt and use extra cash flow to retire the high-interest obligations first.
Consolidating, refinancing, and paying down that high-interest debt should be a priority and can help small businesses regain control over their cash. Small Business Administration (SBA) loans can help, as long as the borrower is the business. Some business owners resorted to utilizing personal credit cards in crunch time. However, refinancing consumer debt into the business obligation is not an eligible use of proceeds unless each card purchase or advance can be clearly documented as a business purpose.
Capitalize on Opportunities
Understandably, Colorado small businesses-and their lenders-are optimistic, yet cautious. A recent report from the Brookings Institution places the economic outlook firmly in neutral. For example, income in the Denver metro has grown 2.2 percent, but employment continues to struggle, declining 1.2 percent since 2009.
The temptation is to keep coasting in neutral, but that could mean missing a competitive advantage.
Small businesses have spent the past two years bracing their businesses and reacting to the economic tides. With the economy headed toward recovery and with interest rates at historic lows, now is the time to consider restricting their debt so they can be poised to take advantage of new business opportunities.
Eric Craine, SVP and Regional Manager for UMB Colorado's consumer and small business segment, has more than 15 years of experience in banking. Contact Eric by calling 303.839.2290 or e-mailing firstname.lastname@example.org.
Eric Craine, Senior Vice President and Regional Manager for UMB Colorado's consumer and small business segment, has more than 15 years of experience in banking. Contact Eric by calling 303.839.2290 or e-mailing email@example.com.