When you put new finance in place, it’s usually a big relief. But often these financial arrangements are never revisited. You keep making the repayments and think no more of it. Yet it’s important to check that these arrangements match what’s available now. On occasion, you may even find it wasn’t a good deal in the first place.
Often you build your banking arrangements over time. A loan for this piece of equipment. Another loan a few years later for more equipment. Then an overdraft facility. Before long you’ve lost track of exactly what securities the bank holds.
How Many Assets Secure Your Loans?
Have you given an unlimited personal guarantee? Has the bank taken wholesale security – “all present and future assets”. That covers a lot. Before you know it the bank holds $1,500,000 security for only $250,000 worth loans. This Case Study details a similar situation.
Does The Money Do What You Want?
Are your loans flexible enough to work for you and your business, or are you hamstrung by the way they are set up? Are they working AGAINST your business rather than FOR your business? Sometimes circumstances change and what worked before doesn’t work now.
How’s Your Interest Rate?
Then there’s the interest question. How much interest are you paying and is there a better way to structure your loans to keep interest down? One thing’s for sure – it’s unlikely your banker is going to come knocking on your door to offer you a better deal. It pays to be vigilant and pro-active in getting your interest rates to match the best available.
This client found a new bank instead of renegotiating with his old one:
John had a great relationship with his bank. He’d been with the same bank for 23 years, and they usually agreed to whatever loans he wanted. John needed another $180,000 to replace plant and equipment. The bank was happy to loan him the money at what appeared to be standard industry rates at the time.
A finance salesman from another bank had a look at the situation and realised –
- John’s company had around $800,000 owing on plant and equipment at various interest rates.
- There was a facility fee for each loan and the bank held security over the specific pieces of equipment.
- The bank had collateral security over the company’s land and buildings. These were worth an estimated $6,000,000, with no mortgage on them.
The new bank –
- Loaned John the $800,000 plus the $180,000 for the new equipment.
- Set up a credit line of another $1,000,000 John could draw down any time with no documentation fee.
- Set the interest rate at 1.75% less than his old bank would offer, and secured it only over the land.
It’s never safe to assume your bank is giving you the best deal it can. So don’t get complacent about your financial arrangements. If they’re not working for you, or you’re not sure, it’s worth checking out some different options. Renegotiating with your bank can lead to huge benefits for you and your company.