Government and Small Business

FINANCE: How will higher interest rates affect my loan?

June 26, 2006

Every time the Q: Fe d e ra l Reserve raises rates, I expect to pay my bank more for financing. I guess I understand the reason for this-the government says it wants to guard against inflation-but the Fed's actions still make it hard for the small-business owner who needs to borrow money.

How can I get the lowest possible rates? And what will my bank require of me that they don't now? Or is there any way around this at all?

Your last statement shows that you A:understand the inevitability of paying higher interest charges whenever the Federal Reserve hikes the discount rate, which it has done regularly for two years. Generally, an increase in the discount rate will be followed within hours by an increase in the prime rate charged by many banks.

Everyone waits cautiously whenever new board Chairman Ben Bernanke announces any kind of rate shift or offers a prediction of future board action.

The Fed doesn't want to stifle small businesses, although that may seem to be the effect. You can do several things to position your company to receive the lowest loan rates available; they are the same things you would normally do.

First, be up to date with all your records. No lender will agree to financing unless he or she has a complete picture of your company's financial health and your ability to repay a business loan.

Look for ways to reduce debt by paying off old loans and accounts payable. If your vendors offer discounts for quick payment, take them if you can. Often it is less expensive to borrow from the bank to take these discounts rather than to pass on them. Not taking the discounts is in effect a very expensive way to finance. Too many obligations will reduce the chances of your gaining new financing.

Conversely, look for ways to increase income and cash flow. Recently in this column, we discussed the necessity of regularly working your accounts receivable list by calling customers whose payments are overdue. Receivables age poorly and must be collected promptly.

Another way to increase income seems obvious: make more sales. I don't know your business, but many companies can make more sales to existing customers simply by advising them of the full breadth of their services.

I know of a metal-stamping company that told a long-time customer it could cut metal tubes the customer needed. This was news to the customer, who promptly boosted purchases from the stamper. Likewise, a company that installs and services computer systems developed the expertise of writing new programs; sales increased when it advertised the new skills to existing customers.

Retail stores are notorious for hanging big signs that say, in effect, "look over here-we also sell" other products. Yet for some reason those of us in service businesses are reticent to educate customers of the full extent of our capabilities.

Finally, when you apply for credit, ask your lender for the best possible deal. Be sure to look not only at the rate, but also the loan structure to make sure it is the right fit for you. Several alternative pro grams for business financing are not well known. Some loans are partially guaranteed by the SBA. Your lender may or may not be up to speed on the resources they can tap on your behalf, but if you ask, they will find more information.

Your objective is to obtain a business loan that you can afford. If you prepare before you call your lender, and then work with the bank, you create the best chance of success.



Wojtowicz is president of Cambridge Capital Management Corp., which operates several alternative financing funds. She can be reached at 843-9704.
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