Like any business owner, Jeff Samuelson never has cash flow far from his thoughts. "We want to be more liquid so we can be nimble in making decisions and not [be] locked into raising [money] to get something done, like funding a new product line or making other moves in the business," says the owner of Samuelson True Value Hardware and Lumber in Craig, Colorado.
Until recently, though, that was difficult because the business's cash flow was being squeezed by a hodgepodge of short-term, variable-rate loans--12 in all. Samuelson knew that consolidating those credit products, which ranged from equipment leases to commercial real estate loans, would help reduce financing costs. And with interest rates rising, the time had come to make the switch to fixed-rate financing. "We knew that if we didn't lock in the adjustable-rate loans, the interest rates would continue [to increase]," recalls Samuelson, 40, who owns and operates the $8.5 million business with his brother, Mark. "We knew we were going to save substantially [with fixed-rate loans]."
To that end, the Samuelson brothers recently consolidated the company's outstanding debt into a $1.4 million loan that has a fixed rate and a longer amortization schedule. "We improved the average rate we were at by consolidating into one loan," Jeff says. "We also improved the rate because of the [interest-rate] climate we're in now, whereas before, we had loans that we had [obtained] over the years at different times [and at higher interest rates]. I thought this was a good time to lock the rates before they continued to increase."
By refinancing, the company saw its interest rate decrease to 6.78 percent from an average rate of 7.8 percent, and it is now realizing a monthly cash-flow savings of $8,000. "When you're talking about loan amounts [of this size]," says Jeff, "a point or two can make a big difference."
In for the Long Haul
Interest rates have risen steadily since June 2004, when the Federal Reserve Board raised short-term interest rates for the first time in four years. This has led to a gradual but significant increase in the prime rate, which sets interest rates for floating-rate loans. "When interest rates are falling, a variable-rate loan is the way to go," says John Milbauer, president and CEO of Patriot Bank Minnesota in Lino Lakes, Minnesota. "But in a time of rising interest rates--where we are right now--anyone who has a variable-rate loan should be trying to fix the rate to make sure they have a handle on what their interest costs are going to be over the next several years."
In reality, though, some types of variable-rate credit cannot be converted into long-term, fixed-rate financing. That's because certain assets are simply too short-term in nature. Cases in point: inventory and accounts receivable. "Banks aren't too keen on giving you a long-term loan on an asset that's going to potentially disappear during the term of the loan," says Scott Page, executive vice president of Vectra Bank Coloradoin Denver. "[A lender] wouldn't do a revolving line of credit to support inventory and receivables as a three-year loan because those receivables and inventory turn over so quickly."