When you notice that interest rates are dropping, you should benefit from the dip and refinance your current business so that you can place more dollars in your pocket.
Unquestionably, you can check if your bank can cut the interest percentage on your loan by two or more percent. Closing costs and the loan origination fee might work out to some points, but you may be able to recuperate the amount in less than a year due to the interest rate savings.
If your cash flow is not a problem for your business, contemplate a different agreement. As an alternative to reducing your monthly payments, you could try refinancing to lessen the duration of your loan. Due to the lower interest rate, you may be able to pay off your mortgage earlier while maintaining the same monthly payments.
Sometimes, companies can make a profit by getting resourceful. As an example, a medical group practice bankrolled its office building a few years ago with a $1M mortgage at 10%. When the rates went down below 8%, they tried out some refinancing opportunities.
One of the associates in the practice happened to own a home with over $1M in equity. The bank was very pleased to finance the doctor’s residence. The doctor used the $1M he loaned out on his home at 7% to settle the 10% loan on the office building.
What was saved? Well, 3% of $1M equals $30,000 per year. This particular doctor’s loan origination fee along with other closing expenses came to approximately 2.5 points ($25,000). In the first several years, the doctor more than recovered these fees from his interest savings.
Certainly, bearing in mind the 25-year term of the new loan, the actual annual rate of the refinancing was a mere $1,000 per year.
Review all your credit costs on machinery, equipment, buildings, accounts receivable, inventory, and lines of credit to decide if you will save by refinancing.
Evaluate all of your loan documentation, as well as collateral and rates reported in the footnotes to your monetary statements. You may have the ability to discuss terms that will reduce the collateral if you make your loan payments on time over a period of time.
Review and inquire about the rates your bank offers you. Many individuals are under the impression that prime rates are only for prime clients. That is not true. Try requesting the London Inter Bank Offered Rates (LIBOR), which are frequently less expensive than top rates for a larger customer that has good credit. LIBOR is the rate that banks charge one another for loans.