USING REFINANCING AS A STRATEGIC BUSINESS TOOL

A sales downturn or rising costs can be stressful for a business owner. If the problems continue, you may even wonder if you can keep up with loan repayments. But all is not necessarily lost. You may still have options to refinance or amend loan terms before you miss a payment to the bank.

The first steps: Figure out the source of the problems, work out a turnaround plan and talk openly with your banker about the situation.

1. Create a turnaround plan

Before you approach your bankers, it’s crucial to get a clear picture of your current situation and work out a solid turnaround plan. Start with three key questions.

  • What led to your problems?
  • What have you done to address these problems?
  • What do you still have to do?

Without these basics, banks are far less likely to work with your business to figure out solutions.

It’s common for businesses to seek refinancing without having a turnaround plan or a good idea of their current situation. Such companies are usually told to come back after they’ve done their homework.

2. Refinancing isn’t a bail-out

When a business is refinanced, the terms of existing loans are typically changed to provide easier debt servicing. As well, the company is usually offered new debt, such as an equipment or working capital loan, to help execute its turnaround plan.

Any additional financing usually requires assets to be offered as collateral.

3. Amend existing loan terms

Refinancing isn’t the most common solution for businesses in difficulty. A much more frequent option is to amend the terms of an existing loan. For example, a business may be allowed to postpone principal repayments for several months, which provides temporary cash flow relief.

4. Line up additional investment

Refinancing or amended loan terms aren’t necessarily the right solution for many businesses in difficulty. Instead, some companies simply need more capital to implement a business plan or achieve positive cash flow.

 

SOURCE:  BDC



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