At the time you go to out to bid for financing on your next project, you should know the exact financing structure that will best meet your company’s needs. Additionally, thinking “out of the box” with your own wish list will reap rewards. Consider these ideas:
Loan Amount – Rather than simply financing your next new project, you may find it highly advantageous to consolidate any existing loans together with the new project into one bigger loan. Why? Interest rates are typically cheaper on bigger deals. In addition, if your needs aggregate $10 million or more, you will have access to alternative sources of capital including insurance companies and national lending units of the nation’s top five banks.
Payment Terms – Get beyond traditional straight amortization thinking to what will work best for your project. At a minimum, most lenders are prepared for interest-only payments for a certain period of time on a start-up project. You may also want to put in a graduated increase in principal payments, or lump sum reductions at strategic times within the life of the loan. Have the loan payments morror the cash flow ebbs and tides in your business. Noone knows your company’s cash cycles better than you.
Never, repeat, never, design a deal with payments over a longer time period than the life of the asset. That’s like getting a ten-year loan on a pick-up truck you are going to drive for five years. When you go to dispose of the truck, you owe more than it’s worth! Conversely, short duration loans on long-lived assets are unduly hard on cash.
Interest Rates – Get out of the prime rate mentality! Many marketers are getting sub-prime rates by asking for rates pegged to LIBOR, Treasuries, or the institution’s internal cost of funds. Lenders differ in their ability to offer fixed or variable rates. In addiiton, more sophisticated lenders offer interest rate swap mechanisms that can provide your company with best of both interest rate worlds for only a small premium.
Collateral – Again, think creatively. No collateral or entirely different collateral than the project. Understand each bidding lender’s collateral comfort zones and offer up only collateral you don’t mind tying up for the length of the loan and which will ideally also help you get the cheapest loan. We are beginning to see a return to “Negative Pledge” collateral which simply means that the lender does not take any collateral but your company promises not to allow a lien on it by any other lender.
Covenants – Know what you can live with and what you can’t, making that clear to the bidding lenders at the time of your proposal. Inquire with potential lenders about their typical requirements before going out to bid. You may drop a few off your bid list, saving you both the time and expense of an unnecessary process.