The art of borrowing

As a small business owner and real estate investor, I regularly talk with my friends who are also into it, and what rates we are paying on various types of debt frequently comes up. Interest rates are undoubtedly important, especially when you have loans in the millions or tens of millions of dollars. They have a significant effect on the monthly overhead that you have to meet.

I have been a business owner for 46 years and have lived in different metro areas and states, so I’ve had a lot of loans and lines of credit and worked with many banks. And when you talk about business borrowing and look across all of those relationships, one thing is abundantly clear: There’s more to a bank than the lowest interest rate. There are other things — some quantitative and some qualitative — that you need to look at when borrowing for your business or real estate.

Here are some of them:

Term of the loan. Banks can’t usually lend money to businesses for extended periods. But in my opinion, a line of credit that renews in three years rather than one you have to renew in a year is a lot more desirable. Many good and bad things could happen in three years, and knowing you have that credit facility in place could be super valuable to you, especially if your business is volatile and may not look so good in any year.

Front-end fees. Always look at these. Some lenders throw big fees in there to secure the loan. Others are not quite so greedy. I like the latter. A half-point on $5 million is $25,000. A full point is $50,000. Don’t be so happy you got the loan that you don’t read the paperwork to see what you are being charged for.

Other aspects of the deal. Are there covenants to maintain a certain debt-to-equity ratio in the company or to pay down a line of credit to zero (cleanup clause) for 30 days? These covenants have to be taken seriously. The bank expects you to keep your commitments. They don’t want their short-term debt financing to replace sufficient equity in the business and become permanent financing.

Turnover in the people you deal with. Turnover in the bank’s lenders and officers is always a concern. You want to have long-term personal relationships with your bank. When those people change, it threatens you and your relationship with the bank. The new people may not know your history and character. They may not like you, or you may not like them. That could create some big problems.

How easy they are to deal with. Some banks are just easier to deal with than others. They fill out the forms for you or don’t make you fill out any forms at all until you sign for the actual debt. Other banks drown you with requests for information; sometimes, it is information they already have. It’s the same thing with construction loans or line of credit draws. Some banks are very relaxed and will give you the draw over the phone or via email. Other banks will want more information, such as lien releases and insurance certificates, before giving you a draw on your construction line and make you fill out borrowing base certificates weekly for your AR (accounts receivable) line.

How they help you if you are in trouble. I have written it before — banks have much less discretion than most people know when granting credit. They are heavily regulated and have to be able to defend any loan they make. That said, having genuine relationships (i.e., friendships) with the people in control can influence their desire to help you when needed. Those relationships can also speed things up. More than once, my banker has gone the extra mile — not doing anything unethical or illegal—to help us. They find a way to make it happen. Other banks will dump you or run away quickly at the slightest sound of trouble. I prefer the former versus the latter.

Mark Zweig is the founder of two Fayetteville-based Inc. 500/5000 companies. He is also entrepreneur-in-residence in the Sam M. Walton College of Business at the University of Arkansas and author of the award-winning book, “Confessions of an Entrepreneur.” The opinions expressed are those of the author.