Seven Essential Tools For Small Business Debt Management

Small businesses use two sources of funds, debt and equity

. Your business may have multiple loans on the books and tracking different terms and rates can be overwhelming. There are seven essential debt management tools that every business should have in place. Use these tools to minimize the chances of a loan default, prepare accurate and timely debt reporting for stakeholders and create the greatest investment return (ROI) on financial changes in your loans.

Prepare a loan summary. The best time to create a summary of the business loan terms is soon after the loan closes. Your memory of the key terms, conditions and pricing structure will never be better than immediately after the document negotiation and closing stages. Your loan summary should contain critical information for the reader including among other things the loan amount, lender(s), the interest rate and how it is calculated, the scheduled principal and interest payments, maturity date, extension options, and reporting requirements. Distribute your loan summary electronically to key people inside and outside of your company who need to know what is in the loan agreement.

Make a loan calendar. Avoid a loan default by marking key loan dates in your calendar. This is especially important for complying with financial reporting requirements. Your lender will get frustrated with late or incomplete financial reporting which may negatively influence credit decisions down the road with this loan and new debt. The loan maturity and interim achievement hurdle are two more essential dates for your calendar.

Calculate and update loan performance thresholds: Be aware of how the collateral is performing relative to financial covenant thresholds in your loan agreement. Know where you stand relative to your loan-to-value (LTV) and debt service coverage (DSCR) tests. Closely monitor any loan extension criteria so you know what it will take to qualify for the additional loan term. Calculate the prepayment penalty so you can make sound business decisions about paying-off a loan early relative to the debt service savings on a refinance.

Share your key loan documents. You may have business decision makers in different departments that rely on loan data to effectively do their jobs. Your accountant needs the amortization schedule to prepare financial reports. Your chief financial officer needs to know the interest spread and guaranty reduction dates to timely apply to the lender to capture these loan benefits. Build or contract for a system that allows for secure, 24/7 access to critical loan documents. Your E-loan docs should have critical sections highlighted for easy reference and user bookmarking ability.

Manage your floaters: The most effective way to lower debt service interest on floating rate loans is to proactively manage any elections available for LIBOR contracts. Many lenders allow the borrower to fix the interest rate index, in this case LIBOR, by submitting an interest rate election form. This freezes the basis used to calculate your interest for a period of 1, 2, 3, 6, or sometimes 12 months. Lenders often limit the number of contracts outstanding at any one time but you can split your loan into multiple pieces with staggered maturities. Keep an accurate log of maturing LIBOR fixes to capture the lowest possible interest rate basis for future periods.

Make data for financial reporting. Your small business needs a way to quickly and accurately calculate key debt data. The financial statements should report the weighted average interest rate across all of your loans. You will also want to know your company fixed/floating rate loan ratio and the respective average interest rates. You will make more informed business decisions and quickly identify trends in the composition and cost of your company loans.

Know your debt roll: Your loan schedule should summarize debt by loan maturity so you know how much is rolling in any one calendar year. This information is critical to decide how long to borrow new money. Bunched loan maturities make small business life difficult because that debt must be refinanced at one time under whatever credit market conditions exist. Staggered loan maturities are better because it reduces the strain on your finance team that will be responsible for finding replacement debt. Be aware of your borrowing exposure by lender so you avoid relying too heavily on any one loan source. Lender diversification is a good debt management policy.

Managing small business debt is an essential business practice. Make sure you have the debt tools and expertise to accurately and timely monitor your loans. Effective debt management requires a responsive approach. Avoid becoming reactive to your loan terms and conditions.

by: Michael Shelton

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