Borrowing Basics

“If I was him,” the taller guy was saying, “I might be doin’ the same thing.” He leaned over the tailgate of his pick-up, the one with the Maine plates, “…especially for a million bucks.”

As I approached the Bailey Island General Store in pursuit of my newspapers last Sunday (reading the Sunday papers on-line is an idea whose time has not yet come for me), I picked up the conversation. I knew what the two Islanders were talking about.

“Yup,” said the other. “Read it in the Anchor. He’s puttin’ the place up for sale.”

I had read the same article in the local newspaper. Charles Abrahamson, whose shorefront property includes the only sandy beach for miles around, had closed off access to the beach at the middle of last summer for the only time in anyone’s memory, raising temperatures all over the Island. In return for a permanent easement through the edge of his property down to the beach, he had asked the Town (pop: 5,300) for $950,000 and been turned down. Now, fourteen months later, his motivation was clear to all — selling his property with an easement (by contract or by common law) might conceivably reduce the value by that amount.

After years of facilitating access to the beach, Abrahamson was cast as a greedy Highlander (summer resident) by many native Islanders and by other summer folk. In a broader, more generous context, he and his wife Sally are essentially trying to monetize their real estate asset at its highest value, which includes either providing their successor with a private sandy beach in perpetuity (at a premium price) or being compensated for allowing it to “go public.”

I have no interest in buying the property or even helping to fund the easement to a beach which we have enjoyed access to for more than 40 years with kids, grandkids, and others, just a 10-minute stroll down the road from our summer house. But as I walked back from B.I.G.S. last Sunday, I began to think about how a bank loan officer would value something as intangible as private access in considering a mortgage application from a prospective purchaser of the Abrahamson property. That, in turn, got me thinking about how anyone assigns value to any kind of collateral in lending money. And, even though it was Sunday, and even though it was just a short walk back from the Store to my sunny deck chair, that got me thinking about a question that one of my clients had posed to me a couple of days earlier: “Is there a way to consolidate all [our] term debt into one note at a better interest rate? Do banks entertain that?”

Not only do they entertain it, they do it all the time, I responded. It’s called “blend and extend.” Of course, they’re generally not enthusiastic about renegotiating a long-term loan agreement simply to lower the interest rate that you have contracted to pay, but unless there’s a prepayment penalty, they have to respond to the market. In particular, if you are expanding your borrowing base (e.g., by purchasing more equipment) and at the same time trying to improve your cash flow by stretching out the payment period, you may have a good case for refinancing. Here’s how it works:

  1. The Matching Principle — Banks and other lenders typically want to match the loan to the collateral that supports it: revolving loans are for revolving assets like inventory and accounts receivable (“working capital” loans); term loans are for long-term assets like machinery and equipment. Real estate has its own category.
  1. The Easier Way to Valuation — In most cases, what you pay for a piece of equipment establishes its market value, so borrow as you purchase, most conveniently by opening an equipment line which may include all equipment acquired during a 12- to 18-month period. Banks will usually lend up to 80% of the purchase price, higher with SBA underwriting.
  1. The Harder Way to Valuation — The problem in consolidating existing long-term loans is that both the “encumbered” (already pledged as collateral) and any unencumbered equipment will need to be appraised (could be $5,000 and up). Even if the same lender is doing the bundling, he or she wants to make sure that the market for the particular equipment has not gone south since its purchase date.
  1. The Leasing Trap — It may come as a surprise, but you don’t actually own any equipment that you have on lease — the leasing company does, and it’s usually getting a premium rate of interest. They’ll relinquish it so that you may use the equipment as collateral elsewhere only if you meet their full prepayment penalty — you’re in for the sum of the remaining payments, which includes interest to the end of the loan. (…which is not to say that leases aren’t useful financing options.)
  1. The Analysis — Estimate your weighted average cost of long-term capital by figuring how much interest you will pay on each loan during the next twelve months (the lender should have provided you with a monthly principal and interest schedule), then taking the total and dividing it by the sum of the outstanding balances of all your term loans at the end of last month. Just as with a home mortgage, compare that with the lender’s current offer, factoring closing costs into the equation.
  1. Avoiding Paralysis — Because banks like to be able to track how you’re doing at any time and get first dibs on your cash in the event of default, they almost always want all of your business (deposits plus debt financing). When you contemplate shifting all of your accounts to a new lender, inertia is your current loan officer’s best friend. But whether you move or not, you should reassess your bank relationship at least every two years — competition among lenders for good loans is intense.

Whether the Abrahamsons move or not, they’ve had to reassess all of their relationships on our little island, in particular those with their abutters, some of whom want in on any deal. For the sake of a single easement, it’s for sure that traffic flow will increase on glorious summer weekends, affecting the value of every home in the neighborhood.

You can bank on it, but you may not be able to borrow on it, unless you’re operating a lemonade stand.

Draining the Swamp

From the Robert Half (“Accountemps”) 2012 Salary Guide:

Title 2012 range

% change from ’11

CFO $96,750–$136,000


Dir. of Finance $87,500–$114,250


Dir. of Accounting $77,750–$105,250


Controller $69,000–$ 95,000


General Accountant:
Up to 1 year $35,250–$ 42,750


1–3 years $39,750–$ 52,750


Senior $49,500–$ 63,750


Manager $59,500–$ 78,500


Note: Salaries indicated are the national mean for companies up to $50 million in sales, except General Accountant, which is up to $25 million. Adjust by applying the following geographic factors: Boston +32%; Springfield +4%; Manchester/Nashua +10%; Providence -3%; New York City +41%; Chicago +22.7%; San Francisco +35.5%.