When it comes to financing or refinancing their loans, small-business owners often face an uneven playing field. Financiers work with loans, loan terms, and loan documents day in and day out. But, for you as a small-business owner, it’s probably uncharted territory. You may not know what questions to ask to protect your own interests.
Here’s some advice from some of those banking professionals about what to ask when refinancing your small-business loan:
1. How much are the fees?
Refinancing involves plenty of fees. Anthony Pili, vice president and director of strategic planning at Greater Hudson Bank in Bardonia, New York, suggests you calculate all the fees you’ll have to pay before you get started. This includes bank fees, attorney fees, title fees, appraiser fees, and so on. If your business is located in a municipality that charges a mortgage tax, you might be able to avoid that tax by “assigning” the mortgage from one lender to another, Pili says. Manny Skevofilax, president of Portal CFO Consulting in Baltimore, says there may also be ongoing fees if, for example, you have a revolving line of credit.
2. Is there a prepayment penalty on the new loan?
If so, Pili suggests you find out “how much it is and when it applies (first five years, three years, etc.). Does it decline each year the loan is outstanding? If so, Skevofilax reminds you to “check if there is a prepayment penalty on your existing loan and how much that is too.”
3. Is the loan assignable to a new owner if you sell the business or investment?
If your business depends on this financing, your buyer can’t pay off the existing loan, and obtaining new financing is difficult or cost-prohibitive, this could jeopardize the sale.
4. Are there restrictions on taking on other debt from a different lender, and will the lender limit how much you can invest in capital expenditures?
“The answers to these questions,” Skivofilax says, “can have a significant impact on the way you operate your business.” Make sure you have enough financial flexibility to run your company.
5. What amortization period are the payments based on?
“Generally speaking,” Pili says, “longer is better because it frees up cash flow due to a smaller payment. But the downside is that it takes longer to pay off. The best of both worlds is a longer amortization period for increased cash flow combined with the discipline to make larger payments on your own during stronger months to pay off the loan more quickly.”