When to Refinance Your Property
When you review your monthly loan payments and cash flow, you may consider refinancing your property or equipment loans. Ray Silverstein, founder of Chicago-based PRO (President's Resource Organization)-a nationwide network of peer groups comprised of small business owners-offers his thoughts on this strategy.
Silverstein notes that small businesses seldom refinance because of falling interest rates since most business loan rates rise and fall with the prime rate. "It's not like homeowner refinancing," he says.
Silverstein offers two reasons to refinance. The first is to reduce your monthly payments. Assume you have a five-year loan and are halfway through paying it. You could possibly negotiate a new five-year note on the balance, Silverstein says. The new loan would be for about half the original amount, lowering your payments and freeing up your capital, he says.
Taking advantage of your collateral's increasing market value would be a second reason to refinance. Banks normally provide advances on appraised equipment, Silverstein says. If an independent appraiser hired by the bank finds your equipment has increased in value, you could borrow more against it.
Refinancing allows your business to finance growth, Silverstein says. "If a company has a major project going or needs [capital] for a marketing plan or sales campaign, they would look at refinancing," he says. "You don't want to finance long-term investments with short-term money-your working capital."
Refinancing also allows small businesses to stay afloat during a downturn or recession, again by freeing capital, Silverstein says. If the market becomes soft, you might need extra working capital, for example.