In Times of Change

Cash flow, payment simplification, interest rates and industry wellbeing come into play in business debt consolidation decisions

BY LISA GIBSON

When oil prices started to slump two years ago, some companies in that industry began to consolidate loans, anticipating the loss of clients and contracts, says Kevin Warner, business lending manager for Gate City Bank in Fargo. It was a preventative measure, a preemptive action when it became clear saving money would be vital.

Industry sources hope the prices bottomed when they hit about $20 per barrel and, as they begin to rebound a bit, many oil-related businesses are again looking for new loans in anticipation of increasing activity in the industry, Warner says.

Paige Bjornson, senior business banker with Dacotah Bank in Valley City, North Dakota, says both scenarios point to common reasons a business might consider consolidating or restructuring debt: a need for lower payments in the face of reduction in cash flow; and a desire to simplify multiple payments in the midst of increased borrowing meant to maintain or enhance operations.

Similar to Warner’s experience with business financing for oil companies, Bjornson says consolidation in the ag industry has become more common recently, as prices there slump, too. Companies are looking to improve their flow of revenue and bridge the finances to the next price increase.

“Just because a bank extends a loan to a business customer for a period of five years with monthly payments does not mean that that business customer, that borrower, is going to live with that loan exactly the way that is for five years,” she says. Certain industries work in cycles, she adds, and a banker’s job is to work with customers and help find solutions when they’re needed.

Increasing Interest Rates

Of course, current interest rates play a role in a business’ decision to consolidate debt or not. “If it’s not going to save them money, they probably won’t choose to do that,” Warner says. The Federal Reserve sets the interest rate, and for the first time in about seven years has begun to consistently raise it.

After the housing market crashed in 2008, the Federal Reserve left the Fed Funds rate at 0.25 percent for about seven years, leaving the prime rate — set by banks and based on the federal rate — at 3.75 percent, Warner explains. In December 2015, the Federal Reserve increased its rate by 25 percent and raised that another 25 percent in December 2016. Each time, the prime rate increased by a quarter of a point. In March 2017, the Fed Funds rate went up again, to 1 percent, causing the prime rate to increase to 4 percent.

So many raises, and particularly the March increase following so closely on the heels of the December increase, haven’t been common in recent years and likely sway business owners away from consolidation and restructuring finances, Warner says.

That Federal Reserve figure is hard to predict and hinges on factors such as the housing market, unemployment numbers, job markets and oil prices, Warner says. The rate was expected to go up for two years before it actually did, he adds.

Updated Finances

Bjornson recommends businesses maintain open communication with their bankers and keep good records. “Good financial records are critical to the success of businesses, small and large,” she says. While keeping the books up to date can be tricky and time-consuming, particularly for small business owners who tend to do wear multiple hats in their operations, it’s important, and especially so in times of downturn. “Our ultimate goal is to keep these companies in business,” she says, adding a business banker is somewhat of a partner.

But regardless of the size of a business or how long it’s been operating, consolidation and restructuring of loans is a common option bankers “absolutely” will explore to suit a business’ individual needs, Bjornson says.

“Businesses, large and small, are constantly facing change and having to update and upgrade equipment, maybe increase inventory … so they are oftentimes looking for some new financing or some changes to their existing financing,” she says. “We want to be there to help.” PB