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Refinancing your mortgage to pay down a pricey business loan

Dear Your Business Credit,
We have a business loan that was taken out when our business was doing well. With the new economy, our business is doing about a fourth of what it was. The loan is at $40,000 and a high interest rate. We have refinanced our home at a much lower interest rate and have taken out cash to clear our business debt and credit cards. Since our bank has made a lot of dollars on our business loan, I would like to know how to reduce what we pay every month with a cash payout. Is this a possibility? Thanks. — Jim

Dear Jim,
It’s smart to do your homework in a situation like this.

When I ran your question past Jeffrey M. Stibel, chairman and CEO of Dun & Bradstreet Credibility, which issues credit scores for businesses, he said that if you made a personal guarantee on the loan, then using your home equity line to pay down the business line could make sense. “Home equity lines are relatively affordable, lower risk since there is no personal guarantee, and — in this particular case — may be a good way to subsidize the business while it gets back on solid footing,” he said.

It could also help you avert the damage to your personal credit that you could potentially suffer if you can’t pay the business loan. “Business credit that is backed personally risks a personal bankruptcy,” he says.

Nat Wasserstein, a crisis manager with Lindenwood Associates in Upper Nyack, NewYork, and New York City, also agreed that refinancing your debt using your home equity line of credit could give you some breathing room. However, he says there’s a downside to tapping your home equity: “You’ll encumber personal assets for business,” he says. What happens if your business fails? You may end up with no way to bring in income and find yourself falling behind on your mortgage, which puts your house at risk.

I assume that when you say your business is doing a fourth of what it was, you are referring to sales. If that’s the case, you may have what Wasserstein calls an “upside down” balance sheet. You could have too much debt relative to the sales you’re taking in. That’s because you took out the loan at a time when you had four times more revenue.

In a scenario like this, Wasserstein recommends that entrepreneurs look for ways to get rid of the debt entirely and not just stretch it out. In an ideal scenario, you’d figure out a way to bring in a lot more money, so you could retire the loan by paying it off. That might mean coming up with a new product or service more profitable than what you are selling now — something you may need to do, anyway, if sales are a quarter of what they once were. Many businesses have had to reinvent themselves in a more digital and global economy, and brainstorming with your business advisors and mentors or a few fellow entrepreneurs that you trust could pay off. Taking a second job for a while may also help you build momentum in paying down the loan.

If those full-payback options are not possible, it’s worth considering another option: a “workout” or restructuring of the debt with your bank. Essentially, you need to alert the bank that you no longer have enough revenue to support the loan payments. This may enable you to negotiate an arrangement in which the bank forgives part of the debt so you can improve the balance sheet of your business.

Why would a bank do this? A lender would rather that you keep the business open so you can pay back some of the debt than see you go out of business, he explains. If you close your doors, the bank will likely have to liquidate the business, and will probably walk away with less money than if you keep working and make loan payments. “It’s a risk management issue for the bank,” Wasserstein says.

However, this is not easy to orchestrate if it looks like you have some other means to pay the debt. “A bank workout when a business is doing that poorly is unlikely if the individual can afford to pay the loan as is,” says Stibel. Given that the loan is for $40,000 and not, say, $1 million, the bank may not buy an argument that you can’t come up with the money somehow.

Anyone looking to do a workout would need a turnaround professional to make a strong financial case to the bank that you cannot generate the necessary sales to pay down the loan, Wasserstein says. Once the bank has that information, it is under an obligation to write down the loan, he says. “They have no choice,” he says. “They can’t lie to bank regulators when evidence is being presented to them that a loan is no good.” Once a bank writes down the loan, it is a lot easier to forgive, he says.

If you want to go this route, don’t just walk into your bank and try to negotiate the terms yourself. This is a complex negotiation, and you need a financial professional with experience in restructuring a business on your side, says Wasserstein.

As in many areas of financial services, some professionals in this area are more reputable than others. He suggests talking to a well-respected attorney in your community who handles business bankruptcies to see if he or she can recommend a good turnaround professional. The Turnaround Management Association, a nonprofit group with more than 9,000 members, is another potential source.

Having interviewed several entrepreneurs who have gone through a workout with a bank over the years, I can tell you that it was extremely stressful for many of them. The bank may play hardball. But in some cases, it may be worth enduring if you emerge with a much lower debt burden and can save your business. Good luck — and please check back in and let me know how you’re doing.

See related: Finding a free bankruptcy lawyer for business, consumer debt, If your company fails, your credit card rate can rise, Repayment, settlement, bankruptcy: Facing debt from failed business

Refinancing your mortgage to pay down a pricey business loanNo 2-in-1 card for tax-exempt organizationsDangers of putting business expenses on a personal cardFinanceDebt […]

No loans, but still getting cash

NEW YORK – Small companies are finding ways to get cash without going to the bank.

Since the financial crisis, it?s become harder for small companies to get loans because banks are scared they won?t be paid back. Many small businesses that qualify for financing are reluctant to take on debt because they?re skeptical about the economy improving.

All that uncertainty has some small business owners turning to services that help them get paid faster while others are making deals to stretch out payments without accruing interest.

For any company, the amount of money flowing in or out is critical to its success. When money is tight, paying basic bills such as rent and electricity can get dicey. But when cash is plentiful, a business can invest in its future by expanding, buying new equipment, hiring workers or rewarding staffers with raises.

Here are a few ways some small businesses are keeping the cash spigot flowing:

Selling whats owed

Joe Reini needed to borrow money in 2009 because cash flow at his Atlanta engineering services company, Mason-Grey Corp. was starting to suffer. Several clients had pulled out of planned projects they could no longer afford. He had no luck in getting a loan. He was even turned down by a bank he had a done business with for years.

?It was absolutely maddening to see opportunities (for business) on the horizon, have relationships with banks and have them repeatedly say no,? he says.

So Reini turned to an online service called the Receivables Exchange, which runs a market for receivables – the money that a business is owed from customers after it sells a product or service.

Here?s how it works: Company A is owed $1,000 by Company B. Company A posts its invoice on the Receivables Exchange where investors can bid for it – for an amount below face value. Company A chooses among the bidders and gets the cash it needs, sometimes within a day. When Company B pays the invoice, the Receivables Exchange handles the transaction and collects a commission.

If Company B doesn?t pay, then Company A would have to pay back the investor. But Nicolas Perkin, the president of the Receivables Exchange, says companies tend to sell invoices from their customers that have a solid payment history. That reduces the risk.

Selling invoices allowed Mason-Grey to improve its cash flow and it was able to hire 20 more staffers. Reini says the company?s revenue has doubled since late 2008.

Now Reini is reconsidering how much he needs a traditional bank. He says he only uses a bank for needs like payroll and paying his own suppliers.

?They?re too slow to adapt to our needs,? he says.

Hiring a middleman

Part of managing cash flow is knowing when a bill will be paid. That?s where companies such as Ariba help. Ariba offers a service called Dynamic Discounting that allows buyers and sellers to negotiate payment terms online. The supplier uses Dynamic Discounting to get a commitment for a payment date from the customer, which eliminates the uncertainty of when a check might arrive in the mail. The service also allows companies to get money sooner by offering an early payment discount. So if a company needs cash now, it can negotiate with its customers online and get paid through Dynamic Discounting.

Mediafly, a Chicago-based firm that helps companies get marketing videos and other content onto mobile devices, is six years old, too young to get a loan or line of credit from a bank, says Chief Financial Officer Johnathan Evarts.

?When you don?t know when the money is coming, you can?t hire staff as quickly as you?d like,? he says. With Dynamic Discounting, ?we know the day we?re going to get paid.?

Evarts says that when customers commit to a payment date, they can?t let it slide – a natural course of events when a customer has to choose which bills to pay, and decides which ones will wait. And using a service like Dynamic Discounting means his company doesn?t have to chase after customers saying, pay up!

Stretching it out

Sometimes having healthy cash flow means holding onto the cash that?s coming in for a longer time – or not having that cash leave a company?s coffers as fast. One way to make that happen is to ask suppliers to extend payment terms.

Mark Toolan, a certified public accountant in Exton, Pa., says his clients have been asking for installment payment plans for the last two years.

?I probably have got more people on payment plans than I ever have since I?ve been in business,? says Toolan, who founded his business in 1997.

Toolan is more lenient because he wants to preserve his relationship with his clients. ?In difficult times, you?re not going to just terminate the relationship. We?re going to work with them.?

Dun & Bradstreet Credibility Corp., a service that rates the creditworthiness of businesses, has seen an increase in the use of more lenient payment terms – what?s called trade credit – by small companies since the end of the recession. CEO Jeff Stibel says the volume of trade credit has risen by 10 percent to 12 percent since late 2010.

Trade credit is a decades-old practice. Suppliers agree to payment terms of 30, 45, 60 or 90 days and don?t charge interest.

The terms depend on the customer?s credit history and the relationship between the companies. Many suppliers give discounts to customers who pay early.

The amount of time that companies are getting to pay their debts is doubling and sometimes, tripling.

?It?s moving from 30 days to 60 days to 90 days,? Stibel says.

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