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Many businesses would rather pay less interest to their bank. Most of them do not know that lower interest rates can often be acheived by simple negotiation.
Many businesses are paying interest rates much higher than they need to. This means that even on modest debts considerable savings can be made if the interest rate can be cut.
In this article I will outline a practical proposal that allows sound businesses to try and cut their interest payments on long term debts. Debts amenable to this approach are secured and unsecured loans*, mortgages, and permanent overdrafts where it is decided to consolidate the overdraft into a mortgage. In order to take advantage of the options available , and avoid wasting time and effort on unviable schemes , you should meet the following criteria:-
1) Be an established business, ( sole trader, partnership or limited company ) with at least 3 years accounts. The accounts should show a good profit history and set a lenders mind at rest with regard to the continued ability of the company to service the debt.
2) Be seeking a loan to value of no more than 65%. I.e. you can offer security which, even in a forced sale would still cover the debt.
3) The security offered should be of a standard nature. I.e. land, factories, warehouses, or the domestic property of the business owners etc. Property should not be of very specialist nature, ( e.g. petrol stations ). A first charge will be expected against all security. Do not worry if other charges already exist, these arrangements normally involve clearing all pre-existing charges during the consolidation process.
If you cannot meet these criteria then you should simply accept that your present interest rate, however steep, represents the risk perceived by your lender, and that the chances of any other lender wishing to take on your case are very low.
It also helps if you can meet a fourth criteria:-
4) Be in an ordinary business. If your company is unique then it is hard for people to judge, but if you are "an hotel", " a retailer ", et al then the fact that any lender will be familiar with the general features of your business will make it much easier for them to give a positive reaction to a good case. If they are not comfortable with the business type then , to be safe, they may often be negative. Sometimes lenders will actually put aside tranches of funds for investment in a restricted type of business, e.g. "£10,000,000 at base plus 1% for Hotels and Guest Houses", and you may be lucky and able to take advantage of such funds.
The businesses that are most likely to make the largest savings are those that made their current agreements when interest rates were higher, their security lower, and perhaps their own financial situation weaker. I.e. if you borrowed a large loan some time ago on weak accounts, but since then your accounts have hardened up then you are paying an interest rate that assumed a higher risk premium than is now justified.
Having decided that you have a case, you need to use that to reduce your payments. This might involve changing lenders, or, very commonly, simply using that option as a bargaining tool to get a better deal from your present lender or , most often, bank.
1) Prepare your case.
At the bare minimum you need to prepare the accounts and rough valuations of the security.
2) Consult a commercial mortgage broker to discuss your case. ( If you don't have an existing connection contact an IFA. They might not deal direct in the commercial market themselves, but if they don't then they will have a reliable contact to whom they pass on such work. Such connections are probably better than randomly hitting the yellow pages).
The commercial mortgage broker will tell you whether or not you have a case suitable for the current market. If they do say you have a case advise your bank manager, ( " as a matter of courtesy " ), that you are considering broking, and would he care to make an offer? ( If you are a valued client of the bank this alone can work wonders and saves a lot of time).
3) Have the broker try to place your case.
He will try and get a better offer than your present situation.
At this point you will be opening yourself up to charges and fees, some for admin, some for work done, as follows:-
a) Preparing the case for presentation to lenders. The broker may have a modest charge for this, ( to weed out timewasters and those who only want it to threaten their bank manager with ), and if the accounts need to be redone, or detailed valuations undertaken, then those professionals will also need paying. ( However if your initial package is well done such professional fees should not become an issue at this stage unless your situation is complex.). Be warned however of people charging fees simply to present a case using your own work, or of fees that are out of proportion with the work involved.
b) Lenders exhibit serious interest and the broker has offers subject to status. ( If offers are picked up then professional surveys and possibly accountants fees should be expected during the completion process). Most brokers do not charge a fee at this stage simply for getting this far, but many will have a bail out charge should you quit at this stage, ( e.g. because your bank caves in ).
c) Fees due on completion of the loan. In a case that moves to completion this is when they get paid. If a broker charges significant fees that are due BEFORE money arrives then avoid them. If a lender wants a fee BEFORE a loan is issued then avoid them. ( One of the worlds favourite scams is to offer loans subject to an advance booking or application fee. Needless to say the money rarely exists ).
You can of course keep your bank appraised of the brokers progress, or simply wait until you have a status confirmed offer and then let them have an ultimatum.
If you have a good business and debt then there is a good chance that you can cut your interest rate by simply consulting a suitable broker and finding either a new lender to transfer to, or perhaps force your current lender to cut their rate to the market level. Costs are minimal for the exploratory stage, and paid for by savings in the event of moving to completion.
Businesses not able to meet the basic criteria should not waste time trying to rebroke.
*Do not be afraid to switch from unsecured to secured debt. At the end of the day most business people can be pursued for debts and forced to sell assets to meet liabilities. If your assets are not protected from your current creditors in the event of problems, then there is little to be gained by paying unsecured rates for a debt that will be, if push comes to shove, paid off by sale of assets.