Should I Refinance My Existing Bank Loans?
With current interest rates, now might be the ideal time to consider whether to refinance agency debt or consolidate debt. Consider this situation:
Your agency currently owes the bank about $180,000 on a loan you took out three years ago to buy out a former partner. Your monthly payment is $4,300. You can't quite remember what your original interest rate was, and you recall borrowing about $300,000 originally. You haven't pulled out your loan paperwork since you closed the loan three years ago, because you have been busy growing your agency. Your gross commissions have grown from $600,000 per year to about $700,000, and it's time to consider making a few changes. First, you would like to remodel part of your office, which will cost you about $50,000. There is also a $30,000 balance on a note payable to another former partner from five years ago. You make monthly payments on this note at about $1,000 per month.
- Should you take out a new loan for $50,000 for the remodeling and leave the other two loans alone?
- Can you afford the payments on the new, $50,000 loan and the two existing loans?
- What if you hit a few rough months where cash is tight?
- How much can you borrow? Should you borrow?
Things to Consider
These are all great questions you would likely ask yourself. If you are lucky, you have a strong relationship with your banker who can help guide you in coming up with the right answers. Your banker will run different scenarios for you that include the possibility of consolidating your three loans into one at current interest rates.
For example, if you were to consolidate all three loans into one $260,000 note at 4.25% to be paid in full over five years, your monthly payment would be about $4,800, which is less than what you are paying on your two existing loans. This may be a good deal for you.
Additionally, the total agency debt of $260,000 is well below the $700,000 annual gross commissions, so based upon several factors about your customer mix that your banker will discuss with you, there is likely sufficient collateral to make this loan.
Finally, have you considered a small line of credit to guide you through any rough spots that might arise? Most companies have an emergency line of credit to give them peace of mind for any unforeseen circumstances.
Our advice to you is to find a banker you can talk to who understands your industry. Someone you can trust. The relationship is invaluable as you grow your agency.