No matter how much money your business makes, it feels like you never have enough because of your loan payments. You owe money to so many people that you’re just passing the ball around trying to make all your bills. Refinancing may improve cash flow, depending on the new terms and total cost.
But not all debt is made for refinancing. Debt refinancing is a lot of work, and you don’t want to waste your time and effort on something that won’t pay off. CFO consultants can look at your specific debts and see what will make sense for you.
Different Kinds of Loans
Merchant cash advances, also known as MCAs, are generally structured as purchases of future business receipts. This type of financing is quick and easy but can cost you big bucks. A product’s structure and cost depend on its agreement; the provider’s name alone does not establish whether it is an MCA. When you take on MCAs, you can get trapped in the cycle of constantly taking out new advances to pay for the last one. A qualified financial professional can help compare refinancing costs and terms.
Accounts receivable factoring is the process of selling invoices at a discounted price for quick money. When people think “discount,” they don’t think it’s a lot of money, and in the case of invoices it might be just 1-3% of the invoice. However, fees for the service can amount to 25%-50% APR when annualized. Factoring can provide working capital, but its fees affect the amount received.
Asset-based lending is similar to factoring because it uses specific receivable invoices as collateral for a loan. This kind of financing may cost around as much.
SBA loans are designed to help businesses that may not qualify for conventional financing, like new startups or business owners with little collateral to borrow with, subject to program and lender requirements. For example, you might borrow $250,000 to fund your operations for the next 7 years at 9% APR. These loans are partially guaranteed by the government, so their terms are often favorable compared with other options. It is often hard to find a loan you can refinance to with better conditions.
SBA loans may be used for eligible refinancing, subject to program rules. The SBA has programs and resources aimed at groups such as women and veterans; eligibility rules vary and change over time.
There are different kinds of loans you can get for your cars, trucks, and machinery that could be available at a wide range of costs. Since these assets depreciate quickly, there may not be enough collateral to support refinancing. Some subprime high-interest loans for vehicles may be worth refinancing.
Bank lines of credit are generally among the lowest-cost financing options for businesses that qualify. Rates depend on the lender, borrower, and market conditions. Draws and required payments depend on the agreement, including its repayment deadlines. Like SBA loans, bank lines of credit can be a lower-cost option for refinancing higher-cost debt.
Convertible notes, SAFEs, and insider/founder loans are pseudo-equity. There’s a common misconception that equity investors will pay off a business’s existing debt. In most cases, that is far from the truth. VCs rarely fund the repayment of existing debt, and few angels will.
What You Need to Do
Here is what you need to do. You’ll need to clean up your historical books, build a pro forma forecast, and provide due diligence documents efficiently.
First, you’ll need to clean up your historical books. If your financial statements are a mess, lenders probably won’t want to take the risk on you.
Next you’ll need to make projected financial statements. Companies that need to refinance usually have past operating losses that cause bad debt in the first place, so lenders need to see how you’ll beat your past in the future. Give them a strategic forecast.
Next, you’ll need to speak with three to five lenders. Start with the banks you already know, then reach out to local and regional banks. Banks often change their risk appetite over time, so it’s a matter of good timing and good luck in addition to the qualities of your business. Large national banks may also offer small-business financing. Suitability depends on the product, eligibility rules, and service needs.
As part of this process, lenders will want to know how you’re going to improve your business’s performance. Be prepared to walk them through your plan and projected financials.
If your business simply is not bankable, reach out to local Community Development Financial Institutions. CDFIs are not-for-profit lenders whose mission is to support small businesses and they take the risk other lenders won’t.
The closing process on refinancing will involve many due diligence documents. You will need to have prepared your historical business financial statements, your pro forma forecast, three years of business tax returns, three years of personal tax returns, your personal financial statement, recent business bank statements, and documentation for any existing loans that will be refinanced.
Personal Guarantee
One final word of warning. In business school, they tell you that by getting an LLC you’ll protect yourself. But many small business lenders require a personal guarantee, and SBA loans generally require one from owners of 20% or more. Pricing and guarantee requirements vary by lender and product.
About Delancey Street
Delancey Street is a business debt settlement company that helps business owners nationwide. Our goal is simple: negotiate proposed settlement terms with creditors, subject to their agreement. We are based in New York. We tell you how it is; because your business and future is on the line.
