Executive Intelligence: Five Things You Need To Know About Business Loans
The smart executive never stops learning.
Experienced business leaders should know the most important truths about borrowing money. Non-financial managers can especially benefit from understanding these important business borrowing principles.
Know what to look for in a business loan terms sheet. The business financing process usually begins with a loan terms sheet. It's important for the business executive to understand the risks and benefits of the proposed financing. The terms sheet contains many primary loan terms but there are numerous ancillary terms that will show up in the loan documents. The terms sheet and the loan documents can have an adverse impact on your borrowing experience if not documented correctly.
Key takeaway: Know how your lender determines the maturity date, loan amount, interest rate, collateral, prepayment options, closing costs and loan guarantees.
Understand the truth and consequences of a business loan guaranty. Guarantees are a game changer. Without them, questionable projects would die on the drawing board with the reality that funding is unlikely. The lending community would embrace great projects because of their solid business fundamentals and high likelihood of repayment. Borrowers would exercise greater borrowing self-discipline with the understanding that any loan they made would be their responsibility with little possibility of outside intervention or rescue. Get smart about loan guarantees.
Key takeaway: Loan guarantees are complex legal documents with enormous financial implications for the borrower and sponsor. Get qualified legal and finance help.
Have a capable loan administration system. One of the most important parts of borrowing money for your business is managing the servicing requirements after closing. The buzz of the closing celebration and the bulge in your bank account from new funds will quickly fade. This will be followed by the hangover of covenant compliance, the nausea of financial reporting and the migraine of lender communication. Loan administration requires specialized expertise to efficiently satisfy your lender's financial reporting and other servicing demands.
Key takeaway: Be staffed and equipped to respond to lender demands for consistent financial reporting, covenant compliance, consent request processing, floating rate (LIBOR) management, collateral inspections and bank meetings.
Give your business a capital makeover. The pursuit of business funding is like a capital courtship. The competition for attractive business loans and equity capital is intense with lenders and investors searching for the most promising and creditworthy companies. Do you need a capital markets makeover to attract the sources of funds your business desperately needs?
Key takeaway: Shape up your loan collateral, administration systems and credit history. Provide multiple sources of loan repayment and excellent borrower sponsorship to secure the best capital terms and pricing.
Know the key dates and covenants in your loan agreement. How you manage important loan dates can make the difference between a good borrowing experience and a debt disaster. The successful business borrower focuses on the critical dates during the loan negotiation process. The covenant compliance bell is hard to quiet after being rung. Loan waivers can be time consuming, messy and expensive. Be a smart borrower and understand the key dates in your business loan agreement.
Key takeaway: Know and calendar your loan maturity date, extension periods, interim achievement hurdles, amortization period, and prepayment windows to maximize borrowing effectiveness.
Drive your loan interest rates lower. Why does the interest rate matter? The interest rate determines your loan payment. A lower interest rate equals less loan interest expense. Also, the loan size is limited in part by the debt service coverage ratio which is calculated using the annual loan payments. The smart borrower understands the critical role and components of the commercial loan interest rate when evaluating financing.
Key takeaway: Understand fixed vs. floating rate, the calculation method (e.g. 30./360, actual/365), components of the all-in rate, spread reduction hurdles and IO options. Be a shrewd businessperson by negotiating favorable interest rate terms in your loan agreement.
Be aware of what you don't know. Your business management blind spots can be eliminated through continuing executive education and coaching. Finance is a core competency that can make your business more durable.
by: Michael Shelton
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