If you find yourself in special loans with a major bank for whatever reason, there is going to be some urgency to get them paid out before they start realizing on security.
There are a whole number of ways you can get into special loans, the most common is when you’re offside with one or more of your loan covenants. But even if you’re onside with everything, the bank doesn’t have to have a reason as these loans are typically made on the condition that repayment can be demanded at any time.
So, regardless of how you got there, the bank has stamped special loans on your forehead and are either trying to squeeze the cash out of you drop by drop, or have set some sort of deadline (typically between 30 and 90 days) for repayment to occur before they start realizing on security.
So what are you’re options?
If you’re truly not offside or only marginally offside on your covenants, you could potentially go to a competitive bank that is currently interested in your business profile and industry.
The first challenge with that approach is that other banks are going to think there is something more seriously wrong to warrant the special loans tag, so they may not give your request any serious attention.
The second challenge is that even if they are interested, they may not be able to move fast enough to assess your application and get financing in place before your bank starts trying to realize on security.
A bank refinancing request for several million dollars can take 60 to 90 days, or more to complete, depending on the assessment process required and the conditions that need to be met.
So, when pressed for time, and requiring a higher probability of success, many businesses turn to asset based lenders.
For service companies that may only have accounts receivable to offer up as security, factoring becomes the only viable option in terms of speed and predictability. But to even make this work, there will need to be enough margin to cover the higher cost of financing. While a bank line of credit can be right around prime, factoring will run at 1.5% to 2.5% per month.
For businesses that have physical assets, there are more options to consider.
With real estate, it still may be possible to get an institutional lender to provide financing at similar rates to the ones being paid out, provided that there is a recent appraisal and environmental audit completed.
If time is of the essence, then private real estate financing may be arranged at 65% loan to value and interest rates around 10%. There typically is only one year terms on this type of money, so you’re basically signing up for a one year bridge loan before refinancing will be required again.
Equipment refinancing will likely be based on a percentage of forced liquidation value with rates in the lower to mid teens.
If the business has a high investment in accounts receivable, inventory, and equipment, then a working capital form of asset based loan can be arranged utilizing all short term assets as security at rates from 18% per year to 30% per year.
And for any asset based solution, there are likely going to be lender fees to pay as well, making the exercise more costly.
If you spend too much time trying to secure a cheaper financing solution for refinancing, you could run out of time and potentially be out of business.
Bottom line, you want to avoid the special loans tag at all costs. A fast refinancing, if possible, is going to be expensive, and destroy a lot of value in the process.
Yes, every one wants the lowest cost financing, but lower cost financing is not only low risk, but very fickle as well, especially during economic down turns. And everything is set up so the plug can be pulled at any time.