Business Finance: A Fixed-Rate Long-Term Loan? It’s Possible

by Lonnie Bass 12. August 2016

When I talk to acquaintances outside the finance world about my job, they’re sometimes taken aback when I remind them that banks are in the business of selling loans. That’s because, as business leaders, they know how difficult it can be to land a loan.

But the truth is that growing, well-run businesses are great customers for banks, so we work hard to earn their trust. That’s why I’m glad we’re able to provide a solution to a dilemma that many have faced for a long time.

Those in search of a low fixed-rate loan, payable over a time horizon of at least seven years, have had limited options.


Big banks can sometimes offer such loans to qualified applicants, but they don’t usually provide the kind of personalized service that many businesses seek. Yet local community banks that specialize in relationship banking have faced too great a risk in a rising-interest rate environment to make fixed-rate long-term loans.

That’s changing. Thanks to a loan product that utilizes a third-party as a kind of interest-rate insurance company, banks like 1st Mariner can fulfill that need. For loans of $750,000 to $15 million, a hedge product called an interest rate swap might be a good solution for qualified borrowers who want a low fixed rate over a long time horizon at a community bank.

Here’s how it works.

In an interest rate swap, also known as Borrower’s Loan Protection (BLP), the bank makes a long-term, fixed-rate loan to its borrower. Then, it works to hedge against rising interest rates. The hedging goes on behind the scenes and in no way affects the borrower, who simply makes a flat payment each month. Bottom line for borrowers: Once they sign the documents, they’ll make fixed payments until the loan matures.


The Details


Although there are exceptions, these loans are usually for businesses whose net worth is at least $1 million or who have assets of at least $10 million. We can loan up to a maximum 85% of the value (LTV) of the customer’s property. And the borrower can use the loan for a variety of purposes, including acquisitions, refinancing, real estate, heavy equipment, or cash-out. While the bank cannot change a borrower’s interest rate, there may be a payoff penalty if you choose to prepay or payoff the loan early.

 

We find that this product may not be a fit for all borrowers but it gives them another option. One of the benefits of relationship-based banking is that we strive to work with our business customers to find the best financing solution for them, so we’re not going to recommend a loan involving an interest-rate swap to a business that wouldn’t qualify or, for some other reason, wouldn’t benefit.

 

A community bank can also offer a bit more “deal customization” than big banks, which traffic in large loan volumes. A good community lender will personalize these loans so they work for everyone. Community lenders are here to build relationships and reputations – our own and our customers’.

 

If you have any further questions about whether you qualify for an interest rate swap, and whether it’s right for you, don’t wait any longer to contact us.

What's a Good Use for a HELOC?

by Nerd Wallet 8. July 2016

When you take out a home equity line of credit, you're offering your house as collateral to secure another loan. The upside: You can gain access to up to 80% of your home's value, minus your current mortgage balance and adjusted based on your creditworthiness.

The downside? If you can't make your payments, you could lose where you live.

Because the stakes are high, you want to make sure you use a HELOC for the right reasons. Here are a few.

Making home improvements 

Most people who take out a HELOC do so to make home improvements. Experts say you should only do this if the improvements you're considering will increase your home's value. This way, the money you're borrowing will be returned when you sell your house at a higher price.

The National Association of Realtors' 2015 Remodeling Impact Report lists these six changes as the ones with the best return on investment:

  • Installing a new front door.
  • Installing new siding.
  • Upgrading your kitchen.
  • Adding on to your deck and patio.
  • Making an attic into a bedroom.
  • Installing a new garage door.

These improvements can range from a few hundred to tens of thousands of dollars, but they don't change the footprint of your home and tend to be what future buyers look for.

Supplementing an emergency fund

Everyone should have an emergency fund to cover events such as unexpected car repairs and appliance breakdowns. Most people keep these in savings accounts, but you might consider a home equity line of credit as another source of cash. You only pay interest on the amount you borrow, and you could pay the loan off quickly to save money. Still, it makes more sense to have an emergency fund that's earning a little interest rather than one that charges you interest.

Paying off high-interest debt

Because the average interest rate on a HELOC is much lower than the average credit card interest rate, many people think about using a HELOC to pay off their credit cards. This is a great strategy if you're committed to never carrying a balance again. Otherwise, you're just adding another debt at a lower rate.

Regardless of how you use a HELOC, remember that the interest rate is variable and may change each time you tap it. And you'll have to repay the entire loan by the end of the payment period set by the lender. On the upside, the interest you pay on a HELOC is tax deductible*, like your mortgage interest. If you use a HELOC for the right reason, that's just one more benefit.

*You may be able to deduct 100% of your Home Equity Line of Credit interest on your income tax returns. Remember to consult your tax advisor to determine whether your Home Equity interest is tax deductible.

NerdWallet is focused on helping people lead better lives through financial education and empowerment. When it comes to credit cards, insurance, loans or expenses like hospital costs, NerdWallet provides accessible online tools and useful information to help consumers take control of their financial choices.

Why You Didn’t Get That Business Loan

by Lance Johnson 8. June 2016

Business Loans

“We keep getting turned down for loans, but we don’t know why. The bank gave us nothing further to go on.”

I hear laments like this all the time from potential loan applicants who tell me they don’t know why a previous application at another institution– usually a large bank – was rejected. 

The truth is that banks are looking for ways to approve loan applications. But big banks are both more risk-averse than community banks and deal with a higher volume of loan applications, so it doesn’t surprise me that rejected applicants are often left in the dark about the reasons.

So here’s a guide to some of the top reasons banks deny business loan applications – and one pretty effortless thing you can do to improve your chances of getting a “yes.” 

Insufficient Operating History

With community banks approving just over 50 percent of business loan requests (and big banks approving only 21 percent), a clean balance sheet isn’t enough to land a loan these days. Banks are looking for businesses with operating histories of at least three years, a sufficient level of success and credibility, and sustained profitability. If you don’t have a track record, you’ll have a hard time getting a loan. 

Inadequate Management Team 

Business loans are investments, and investments are made as much in the people at the top as they are in the business itself. How long has the CEO been in his or her role at the company? What is his or her prior experience? What about the CFO and other top managers?

Of course, there are some very successful businesses being run by their original founders, who may not have had previous senior management experience. But for every Mark Zuckerberg out there, there are many businesses that suffer, and even fail, when they outgrow the experience and acumen of their founders.

Banks are also looking to see if there’s a succession plan. Many businesses have floundered after a key executive or founder unexpectedly dies or becomes incapacitated, so we naturally want to know what your plan is in such a case – and I’m surprised by how many businesses I see that don’t have any succession plan at all. 

Too Much Customer Concentration

Just as investors are well advised to maintain a diverse portfolio, businesses are healthier when their revenue comes from many different sources. It may feel great to land that “whale” of a client, but when your livelihood depends on too few relationships, you’re at risk. How much concentration is too much? That depends on the business – and it’s a great subject for a conversation with your bank’s representative.

Insufficient Personal Guarantees

If there’s a hiccup in the business, can the people guaranteeing the loan fill the gap until the business gets back on its feet or rights itself? Banks pull personal credit scores, so it’s important to keep that number in line. We also review your personal financial statements and about three years of tax returns because we want to be sure you have enough assets and liquidity to meet personal expenses – and the funds to help your business out if it needs it.

Financial Concerns

Of course, a bad balance sheet will kill your chance of landing a loan quicker than anything else. I could easily spend this entire blog post going over the financial reasons, beyond those already discussed, that a loan might be rejected. But if you own a business, then you probably already know them:

• Lack of consistent cash flow

• Insufficient collateral

• Lack of working capital

• Weak equity position

• Too much existing debt

What some business owners don’t know is how much debt is too much. The rough benchmark almost every bank uses is three times your cash flow. That’s 3 × (net income + interest expense + depreciation - withdrawals). 

The One Thing Every Loan Applicant Should Do

I always recommend that business owners sit down in person with a bank representative in advance of applying for a loan for a candid conversation. The subject: whether you’re a good candidate. If you are, he or she will help you navigate the process and advise you on ways to boost your chances of approval. 

Then, when you do apply for the loan, have everything in order. Banks usually look for three years of business and personal tax returns and financial statements, accounts receivable and payable. That will expedite the time it takes to get a decision; here at 1st Mariner, for example, we can make a decision very quickly after receiving everything we need. 

Like I said up top, banks want to make loans. The surest path to getting there is to cultivate a relationship with your bank. 

If you have any questions, we’re here to answer them.



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