Ask the Small Biz Adviser By Stephen Windhaus • Bankrate.com

Evaluating consolidation of business loans

Dear Small Biz Adviser:
I own a small cleaning business in Georgia. I have been in this business for two and a half years. I have three loans, one of which is a Small Business Administration loan, the second AMEX and the third from a bank. I am wondering if there's any need to consolidate these loans.
Thanks,
Erma

Dear Erma:
Typically loan consolidation is done to:

1. Reduce the total monthly principal and interest paid out on loans.
2. Increase the amount of cash, either available to pay other expenses or to add to cash-on-hand in the bank.

You first need to examine the terms of each loan and the reasons you are considering consolidation. Simply add up the existing monthly payments to determine if the total monthly principal and interest paid out can be reduced. Then proceed to apply for and solicit a consolidation loan. Consider the following example:

In this example, when it is time to negotiate the loan, look for one that requires monthly principal and interest less than $1,270. Erma, I recommend you develop a matrix like the one above for your existing loans. Take it with you when applying for the loan and you should learn pretty quickly whether your needs can be met.

Now where do you go to solicit that consolidation loan? I suggest the following:

• The bank holding the present loan is an excellent place to begin. That bank is making money from the interest charged on your loan. If you consolidate that loan at another institution, they lose future profits.
• Approach the lending institution that issued the SBA-sponsored loan. SBA loans offer very competitive terms.
• You can approach your AMEX representative, but I don't know if AMEX can be as competitive as the local bank or the SBA. Regardless, see if AMEX can compete.
• Approach other local lenders. Create a competitive environment for your business. For example, if you conduct business with banks other than the one holding your present loan, solicit its terms.

Finally, there is the matter of the actual application and supporting documents you need to provide. You've already been through the SBA process, but let's review the data critical to secure any loan:

• If you operate a proprietorship, the lender will likely place an inordinate amount of priority on the personal credit report.
• Regardless of the company's legal status, the lender will likely want to review financial statements for each of the years you have been in business, with a separate set of statements for the last six months. Cash flow, historic cash on hand and ratio analysis will play a strong role in the evaluation process.
• A personal financial statement will likely be required. You had to fill one out for your SBA loan.
• Other supporting documents can include a copy of all outstanding notes payable, a list of all assets that can be collateralized, and listings and reports of days payable and receivable.

This sums up what you need to consider. I wish you well with your decision.

-- Posted: July 31, 2001