Securing a business loan in a higher interest rate environment is possible, but researching different options and understanding the terms of your agreement before committing to anything will give you the best chance for success.
When looking for a business loan in an environment with higher interest rates, it is prudent to look for creative options. Try considering alternative lenders and loan products, as well as negotiating terms with your current lender. Most lenders are willing to negotiate and may provide better interest rates or terms if you approach them with a reasonable offer and well-structured action plan.
With careful research and planning, you can ensure that your business loan works for you in a higher interest rate environment.
Alternatively, connecting with a commercial loan broker can help expedite this review of your current loan structure and identify solutions to handle this higher interest rate environment. These professionals are typically hired by the business owner to help structure credit requests, negotiate with lenders and present terms to you while you focus on your business.
Here are a few high-level things to consider in this market:
Business Success
If your business has shown success year-over-year, you may be able to negotiate better terms on your loan. Banks often view successful businesses as less risky investments and are more willing to offer lower rates. It’s important to demonstrate your ability to generate consistent profits and pay off debt on time.
Financial Covenants
Financial covenants in your loan agreement may limit your ability to leverage more funds or access additional working capital. Reviewing and understanding these restrictions is essential so you can effectively plan for ways to obtain the financing needed without exceeding any predetermined guidelines. It is possible to increase the covenant ratio or remove them altogether.
Collateralised Loans
Sometimes, a bank may require additional collateral to secure the loan. This can include real estate, personal guarantees, or corporate guarantees. It’s important to know what type of collateral the bank is asking for and how much it’s worth.
If your current level of collateral is higher than necessary, you may be able to negotiate with the bank to reduce their required security. You can also work with a commercial loan broker to devise alternative solutions to secure the loan.
Reporting Requirements
When securing a business loan, review the reporting requirements you must provide to your lender. Depending on the loan agreement, most lenders will require some form of regular financial reporting for them to monitor your business performance and ensure that their loan is being used per the terms.
Consider if you can reduce your monthly reporting to quarterly or annually to save time for you or your staff. This is particularly important if the interest rate you are being charged rises, as more frequent reporting could quickly become a drain on resources and profits.
Also, consider any additional fees or charges associated with generating the reports and submitting them to the lender. Make sure that these costs are factored into the total cost of the loan and that you can still make a reasonable return on your investment.
Be sure to review any potential penalties for missing or late reports. Missing deadlines could adversely affect your credit score and possibly result in additional fees or other consequences. Ensure that all reporting requirements are understood upfront and that any necessary measures are taken to ensure that the reports are submitted on time.
Refinancing
One option to consider in a higher interest rate environment is refinancing. Refinancing an existing loan can help you keep up with the market and secure a more favourable interest rate.
When refinancing, there are several strategies to consider that may help you manage cash flow needs. You can extend the amortization period of your loan, which can help reduce monthly payments. Additionally, you may be able to request lower pricing from your lender, which could also reduce the cost of borrowing.
Make sure to explore all available options for loan repayment. For instance, investigate different payment plans that offer more flexibility and could help meet immediate cash flow needs.
Before You Commit
Finally, before deciding to take out a loan, make sure you plan how you will use the money and can realistically afford to pay it back. Taking out a loan in an environment with higher interest rates can still be beneficial if done carefully.
With research and shopping around, finding a loan product that works with your business’s needs at a reasonable rate is possible, but can also be very time consuming. Connecting with a commercial loan broker can take over this process and provide quicker solutions due to their strong connections with lenders and understanding the fundamentals of credit structuring.
Breaking it Down
In summary, take the following steps
to ensure that you secure a business loan in a higher interest rate environment:
- Review and understand your financial covenants.
- Determine if increasing the covenant ratio or removing them altogether is an option.
- Check for any early repayment penalties before agreeing to a loan.
- Carefully research and analyze the terms of your loan before making a decision.
By following these steps, you can ensure that any business loan taken out will benefit your company in the short and long term.
Here’s to finding the right loan at the right rate for your business!
-Patrick Youssif, Commercial Capital Advisor
Contact: patrick@ashdowncapital.ca
