THUNDER BAY – Business – BCD Perspective – Whether you’re facing rapid growth, dealing with seasonal sales fluctuations or looking for additional capital to finance a new project, refinancing may be an option as it enables you to restructure your debts to obtain better payment conditions.
Start with a sound analysis of your financial situation
When your business is growing, it’s not unusual to have cash flow planning and management challenges. Perhaps your sales growth isn’t in line with your overhead expenses, or you’re lacking the working capital to manage higher inventory levels. “Whatever your situation, before you consider refinancing, the first step is to look carefully at your balance sheet and cash flow statement,” says Madora Moshonsky, Associate Account Manager, BDC.
The balance sheet is a financial statement reflecting your company at any given time. It provides a snapshot of your assets (what you own), liabilities (what you owe) and equity (what was invested). You use your balance sheet to report your company’s annual accounts, help investors and creditors assess how much your business may be worth, and analyse and improve how you manage your company.
A future cash flow statement provides a detailed forecast of whether your business will have enough cash to pay its loans and expenses. When used properly with your balance sheet, your cash flow statement can help you predict and prevent cash shortages and anticipate additional financing needs.
Know your refinancing options
Let’s take a look at some of the most common scenarios where refinancing could help your business.
A common error for entrepreneurs is to use short-term assets such as cash to pay for fixed assets such as equipment. Since short-term debt is less expensive than long-term debt, some business owners tend to want to pay for long-term needs with their working capital. In reality, few entrepreneurs can pay out these large sums of money without making their companies vulnerable. “Ultimately, it’s not a good idea to take chances with your operating funds. A better alternative would be to take out a long-term loan to pay for fixed assets such as equipment. By doing this, you can use working capital to fund other important growth projects such as exporting, for example,” says Moshonsky.
Be sure you negotiate a loan amortization period that enables you to handle your payments without tapping into your working capital, which you need for operations and growth. With extra money from the lower payments, you can focus on growth projects, such as marketing, which ultimately generate long-term revenues. Example: if your equipment is worth $120,000 and it’s amortized for 4 years, you might consider renegotiating a 7-year amortization period in order to lower your monthly capital payments.
If you have a seasonal business, such as in tourism or farming, in which you have slower periods, you can negotiate variable payment terms where payments are disbursed according to your cash flow structure, quarterly vs. monthly. This makes it easier when business is sluggish.
As a smaller business, your original long-term loan may have carried a higher interest rate because you were considered riskier by your lender. Today, your company may be showing consistent and strong financial performance, which means you may be a lower risk for a lender and you can renegotiate a better interest rate. You may also want to change from a floating interest rate to a fixed rate. If you are looking for peace of mind, a fixed rate provides unchanged payments for the term of the loan. A floating rate should mainly be considered if variations in your interest payments do not seriously impact your financial viability.
Refinance to consolidate debt
Businesses can combine larger loans in order to diminish their monthly payments by extending the total of the debt over a longer period of time. For example, a business may have an equipment loan of $400 thousand over a 7-year period and a building loan of $1 million over a 15-year period. By consolidating the loans into one, the terms and conditions are improved if the payment period is now 12 years.
Refinancing to increase working capital
You can also increase your working capital by refinancing expenditures, such as equipment or inventory. Keep in mind that working capital is the amount of money you need to operate your business on a daily basis. To understand how much working capital you need, make projections for items such as accounts receivable, inventories and accounts payable. Then compare the working capital that you actually have with what you’ve forecasted. If there’s a gap, you will need more to continue your operations.
The Business Development Bank of Canada is passionate about one thing: entrepreneurs. Helping them is our raison d’être. BDC listens and knows how to meet their needs. We have business relationships with 29,000 entrepreneurs across Canada. We understand the challenges they face every day, and we use our human and financial capital to provide the means to reach their aspirations. At BDC, we do everything to help entrepreneurs grow their business. BDC offers financing, venture capital and consulting services. BDC focuses on small and medium-sized enterprises (SMEs).
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