The Fed is raising rates, and LIBOR rates are rising in step with the Fed rate (as expected), which will be affecting existing floating rate loans. How do you get good rates and terms now?
Treat Your Financing as a Separate Profit Center
You make your profit margin in pennies. But are you giving big dollars wastefully to your lender because you're not getting the best financing rates and terms? This is the time of year to review your year-end numbers and develop a well-thought-out strategy for obtaining the best rates and terms.
You already scrutinize each of your operational profit centers. Are you doing so with your financing? If not, treat your financing as a separate profit center. You review every line item, scrub every expense, and tighten down every expenditure for your operational profit centers. Do the same with your financing. Every loan. Every fee. Every term.
Borrowing Rates Remain Extremely Low
The Fed has an impact on short-term rates, but the Fed’s funds rate - the rate that banks charge each other on overnight loans – has limited influence on long-term rates. So unless the Fed tampers with the bond market with unusual selling or buying of treasuries, long-term rates are more driven by inflation expectations and global demand for credit. Right now, ten-year Treasuries yield just 2.17 % and two-year notes only 0.94 %.
Prepare a loan package that explains your business.
What’s important to you. Is it rate, term, guarantees, etc. Focus on what you want to accomplish in obtaining the financing. What are the nuances of your profit centers; i.e., what happens to profit when prices go up and credit card fees increase. Note well... Lenders will not lend if they do not understand your business.
Determine and then place your package in front of the right lenders
Trying to fit a square peg in a round hole will only waste your time and effort. Research who is lending to downstream petroleum these days. Tailor your package with regard to type of financing (equipment vs. real estate) and size of financing (single unit vs. multiunit multi-profit), etc.
Present a package that fully addresses each specific lender’s requirements. Do your homework. Present to the right person.
Research what each specific lender requires, and to whom you should present the package. Address those requirements in your presentation. Don't just give them a stack of papers and expect them to dig for information. Instead, give all information to them in an easily manageable format. Prove it up with good books and records. Present to the right decision-maker. Otherwise you waste a lot of time and effort as your package gets shuffled around endlessly without any decisions being made.
Competition is good.
Present your package to a number of qualified lenders. Similarly situated lenders have greatly different appetites and requirements, costs of funds, etc. Let them know that you are presenting to a number of lenders. They will start sharpening their pencils, especially when they realize they are in a beauty contest.
Use an Adviser or Do It Yourself
If you seek financing yourself, are you playing to your strengths and is the time spent seeking financing the best opportunity cost of your time? Also, do you have the time, patience and expertise available in-house to research — and negotiate the financing issues that will impact you for years to come?
If you get it wrong, and obtain poor terms and covenant structure, you may end up paying for your mistakes for a long, long time. Remember against whom you are negotiating - a loan officer , credit committee and underwriting staff that have many years of experience negotiating the lender’s side ...
You also may spin your wheels and never get the financing closed. Or much worse, you may not even get in front of the right lenders for your transaction.
Let's face it, you can’t be the smartest person in the room on all topics. Instead, hone your skills in finding and effectively utilizing competent advisors for your decision-making in all important facets of your business; they will save you money and costly mistakes with their experienced guidance.
Also note that if you seek financing yourself you will save an advisers fee; however, the savings obtained by a competent adviser will equal that fee many times over. There are many good advisors. Be sure to choose only professionals with proven performance. Base their fees on success. Check references.
In conclusion, this is the time of year to review your year-end numbers and develop a well-thought-out strategy for obtaining the best financing rates and terms - a great opportunity to assess your business model and financing; and make profitable changes. Borrowing rates remain extremely low, and there is a tremendous amount of money available to our industry.
Article provided by:
Corey Henriksen
ACQUISITION AND REFINANCE CAPITAL, INC.
949.481.8500
Corey Henriksen is Managing Director of Acquisition and Refinance Capital, Inc., a firm founded for the sole purpose of obtaining numerous capital alternatives for wholesale and retail owners and operators in the petroleum industry.
Corey is a long time member of CIOMA. His perspective is as an attorney and adviser representing solely petroleum wholesalers and retailers in securing financing from a full range of lenders. He helps petroleum industry borrowers increase working capital and accounts receivable/ inventory lines of credit and obtain acquisition, construction, and refinance funding; as well as work out loans that were either securitized in pools or held in portfolio. He has been doing this for over 25 years and only for downstream petroleum.
Corey can be reached at 949.481.8500 or www.AcqRefCap.com.