MARCH NEWSLETTER 2023
Managing debt is tricky and even when the funds are available, deciding which debt to pay down first can also be a difficult task. If your company has taken on several loans or debts, how do you decide which ones to eliminate first?
Debts like credit cards or business lines of credit often have higher interest rates and little to no potential tax benefits. It’s best to retire these debts first, because they can eat into operating cashflow or company reserves.
To start, make a list of debts by interest rate—list from highest to lowest and start at the top. Paying off debts with the highest interest rates can greatly reduce your total owed over time. Often these high-interest debts will include credit card debt should be eliminated as quickly as possible. Math doesn’t lie. The average credit card interest rate at present is 24 percent. A 24 percent increase on any outstanding balance adds up quickly.
In all, your company credit rating is tied to how much you owe creditors. Less owed equals a better score and conversely having a higher credit score helps you qualify for lower interest rates on loans. Your company credit score does more than determine the amount of debt your company can take on; it affects the interest rates and terms, just like in consumer lending. This all ties into your credit utilization ratio, which determines how much debt your company qualifies for.
By lowering your credit ratio, which is calculated by how much you owe in relation to your available credit, you’ll boost the score. A higher score plays a part in how lenders judge your business's eligibility for credit and increases the opportunity to access more funds as needed.
Some debts however are considered good debt, if they can increase your overall net worth or help generate income. A commercial real estate loan is a prime example of good debt because the debt here is secured by the value of the property. Additionally, when the business owner consistently makes on time loan payments, they exhibit financial reliability, which is what lenders like to see. At the end of the loan, the business owns the property, which is full of business benefits.
As a business owner, it makes sense to prioritize the elimination of high interest debts as quickly as possible so you can invest your capital into projects which will make you money in the long term. It’s a smart move for you and your business.
What Kind of Debt Should be Retired First?
Funding Options for Distressed Assets
If a company has difficulty meeting its financial obligations or suffers a downturn, the company’s ownership may be faced with the option of liquidating distressed assets. A distressed asset is when something of value is sold at a reduced price to raise cash or pay debts to help manage a company’s financial difficulties. Debt restructuring and reduction of liabilities are strategic ways to keep a business in the black and possibly avoid bankruptcy. Another option for company owners is to consider funding for distressed assets.
If you’re a company owner seeking to finance distressed assets, you have a range of available options. This type of funding is based on the value of the distressed assets rather than the company’s financial position. Lenders offer a loan based on a percentage of the asset value. Traditional lenders may not finance a distressed business because of the higher risk of bankruptcy, so this is often an area for alternative lenders. As with any situation where you may be considering funding, seek out lenders who have experience with distressed assets. You may want to use a financial advisor or attorney who is skilled at working with distressed businesses to discuss what would work best for your situation.
Options for financing distressed assets include:
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Inventory Loan: Loans that use business inventory as collateral.
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Factoring: A factor buys outstanding invoices for less than the full amount owed. Then they seek full payment from the invoiced customer—with the difference (and any fees) being their profit.
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Equipment Loans: Loans that use company equipment as collateral.
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Commercial real estate loans: Loans that use a company’s commercial property as collateral—also called property loans.
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Bridging Loans: Short-term loans that provide immediate financing to stabilize a business. The distressed assets may serve as loan collateral. The bridging loan can be a short-term solution to help keep a business afloat until cash flow improves or a longer-term solution is found.
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Equity Investment: Another option is to find equity investment from private investors or venture capitalists. This provides working capital to a business in financial difficulty without taking on additional debt. Investors are rewarded with partial company ownership and may seek board or advisory roles within the business.
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Federal grants or loans: Federal, state, or local governments may offer grants or low-interest loans to businesses in financial trouble to help them recover. The Small Business Administration (SBA) handles federal loans to small businesses through traditional lenders.
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Bond and Public Financing: A company can issue bonds to raise money. The buyer is assuming the risk that the company will stabilize and turn around financially. Such bonds usually have a high rate of return and can be attractive to investors.
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Stock Financing: Loans against the value of the stock which the company or owners hold.
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Tax Credit Financing: A company can sell transferable tax credits to another business that wants to lower its tax liability.
Securing funding for distressed business assets can be a challenging and lengthy process, but if done correctly, it can help stabilize a difficult financial situation. You need to be patient and persistent with the process, as a reputable lender will provide you with options best suited to your situation. You should seek advice from a financial advisor or attorney specializing in distressed assets to make sure you’re getting the best solutions for your company.
Sources:
Factoring Helpline: Business Funding for Distressed Businesses: https://bit.ly/3IX815G
Grey Reed: A Guide to Buying Distressed Assets: http://bit.ly/3Z59Bbi
Loeb Equipment: Distressed Lending: http://bit.ly/3YVM8sV
Sasson Cymrot Law LLC: Distressed Assets: http://bit.ly/3ksNGeU
Sassoon Cymrot Law LLC: Distressed Business Financing: http://bit.ly/3Sujqgp
Assets can be categorized as personal property belonging to the owners or partners, such as a home, boat, car, or other items of value. Business property assets consist of equity ownership or real property such as inventory, equipment, real estate, or accounts receivable. For example, if a retail company is struggling financially, the owner may want to sell the business inventory and equipment—usually for less than the asset’s full value—to pay the company’s operating expenses or creditors. They may also want to leverage personal assets to secure larger amounts of capital to better manage debt.
Is a Funding Broker Right for Me?
A funding broker can be a valuable resource for a business seeking financing. They help business owners who aren’t aware of the available range of funding options or who don’t have the time or experience to locate financing. An experienced broker already has working relationships with a variety of funders. While some brokers specialize in specific areas, such as term loans or equipment financing, some are generalists and deal with a range of funding types.
A good broker will be experienced in your industry, and have a strong track record of successfully obtaining financing and positive reviews from past clients. (Ask other company owners in your network for a referral.) A funding broker should be licensed and accredited in your state and clear about their terms and fees from the outset. For example, who is responsible for the broker’s fee in your agreement—the lender or the client.
Before you work with a funding broker, you need to have a clear idea of your business financing needs. This could include the amount of funding you need, why you need it and when. You should also be clear about repayment levels your business can support without financial stress. Once you’ve found a broker, be transparent with them about your company’s financial situation, including any past credit or financial issues. This information allows a broker to find the best financing options for your business, even if you have a low credit rating.
Ideally, a broker will provide you with a choice of funding options. These can vary in terms of interest rates, repayment terms and fees or charges. The broker can walk you through the options and help you decide which funding best suits your needs. They can also help you negotiate the best possible terms, including lower interest rates or lower repayments.
Sources:
The Balance Money: What is a Business Loan Broker?: http://bit.ly/3ZgUefD
Commercial Capital Training: Financial Broker: http://bit.ly/3YRlW2J
Forbes: Business Loan Broker: http://bit.ly/3SjJMkY
Lendio: Business Loan Broker: http://bit.ly/3Z72U7W
Finally, working with a broker can be the start of an ongoing relationship that helps you secure future financing as your business grows. Stay in touch with your broker and update them regularly on your business performance.
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FUNDING TRENDS: What to Expect in 2024
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