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Taking Advantage of Low Rates

Refinancing debts with new, lower borrowing rates.
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With interest rates at (or near) their lowest trough in many years, a lot of business owners have already done the obvious things to reduce their financing costs. Where possible, for instance, they've reset their fixed-rate loans. But before you put money costs out of your mind, there are still some ideas worth investigating. Here are several areas financial pros suggest for consideration:

* Leases. A lot of people forget that until recently many equipment leases were based on interest rates of 20% or 21%. While many of the leases have stiff cancellation penalties, some don't. And even when they do, there may be inexpensive ways out of them. William W. Lee, a financial consultant in Guilford, Conn., suggests buying out existing leases with less expensive bank money. It's easier to get the lessor to cooperate, he says, if you're willing to acquire new equipment at the same time. It helps, too, if you can talk about potential business in the future. "Rather than dealing with the financial people," Lee offers, "you'll have better luck dealing with salespeople."

* Discounts on purchases. Many suppliers offer customers financial incentives for paying rapidly. One of the most common: 2% if you pay within 10 days, net 30 days. When interest rates were more than 10% and you didn't take advantage of such discounts, it cost you -- but not nearly as much as it will cost you today, says Albert R. McMeen III, a finance professor at New York University's Stern Business School and author of Debt Repayment Capacity (AMACOM, New York City, 1992). McMeen notes that the gap between what businesses pay suppliers on an annualized basis (upwards of 14%) and what they could borrow from a bank at (7% or 8%) is wider than it's been in a long time.

* Term loans. Some term loans, particularly those in which outside investors are involved, have significant prepayment penalties; it may not be economical to retire the debt. If your bank is holding the paper, however, there may be more flexibility, says George M. Dawson, an ex-banker turned consultant in San Antonio, Tex. If you know you can refinance at another bank, Dawson suggests asking your current banker to waive the penalties. "The bank may not let you off the hook completely, but if you're a good customer, it will probably do something." A simple calculation (the penalty divided by the monthly savings on loan payments) will tell you whether the refinancing makes sense.

* Repackaging debt. "This is a great time to look at everything on the liability side of your balance sheet," says Larry Davenport, a partner at Ernst & Young's Toledo office. Time-consuming as it may be, Davenport suggests putting a pencil to paper for every obligation to work out what kinds of savings are possible; it may make sense to consolidate loans and extend maturities, which will boost cash flow.

-- Bruce G. Posner

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Last updated: Dec 1, 1992




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