Karen Benjamin asked: l loans once acquired are often never reexamined to insure that the best financing value has been negotiated. It is an understatement to say that the business world is dynamic and economic conditions are always evolving. Changes often occur that might indicate the need for the reevaluation of a company or individual position with respect to commercial loans. There are several important reasons that might cause one to consider refinancing of a commercial loan. A few of these reasons are enumerated below;
1. Taking advantage of equity gains that may be realized which could enable the borrower to free up capital for other expenses or ventures. This option is often referred to as “cashing out” and offers an opportunity to invest the equity that has accrued in a manner that offers a higher return.
2. Interest rates may have declined or another commercial lender is offering a lower rate and it is prudent to take advantage of reduced payments. Reduced loan payments obviously affect cash flow and enhance one’s financial position.
3. Another acquisition may provide an opportunity to combine loans and recognize increased cash flow or take advantage of more favorable terms and conditions. Combining notes may offer the opportunity to take advantage of the equity that has built up in one note to obtain more favorable financing for another. It also offers an opportunity to strengthen a financial statement by closing out a note under favorable conditions.
4. Taking advantage of an opportunity to lengthen the period of the loan and realize an increased cash flow as well as to take advantage of tax concessions.
5. It may be appropriate to pay down some of the note and renegotiate terms and conditions to strengthen one’s financial statement.
These potential reasons have been highlighted for illustrative purposes, but there are other reasons that may cause one to seek commercial loan refinancing. Each individual or company circumstance will dictate differing responses. As with any decision, an evaluation of the advantages and disadvantageous is necessary to insure that the effort is worth the reward. One needs to assess the total impact of the decision with regard to tax implications, the advantages of cashing out equity, the effect on one’s present financial statement, the opportunities for additional investment and the actual savings that may be available.
It is important to note that a detailed analysis may be required to thoroughly assess the impact of potential refinancing. Loan covenants may need to be revised or renegotiated and should be closely examined to insure that the maximum business flexibility is maintained or enhanced. The bottom line that applies to refinancing is to acquire a business advantage that might go unfulfilled without this refinancing action.
In summary, a review of the status of commercial loans may present an opportunity to refinance and realize a gain that may have been previously overlooked.
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