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Refinancing Is Back — Take Smart Steps

John Fitzgerald, CPA 03.02.2011 | Practice Made Perfect

A recovering economy and a defrosting credit market have opened up paths to fuel growth and add flexibility by entering into new or restructured credit facilities with your lender. Structuring a new bank agreement or refinancing an existing one can be challenging, so any steps that put you ahead of the process will help you be more knowledgeable and place you in a stronger position.

To determine the firm’s liquidity needs, prepare a realistic projection that includes monthly cash flow requirements. The projection should forecast your ability to meet potential financial covenants. Consider whether the firm is able to meet or exceed certain financial ratios and what limits you can place on capital expenditures and distributions to partners.

Think about the firm’s level of tolerance for rate risk. Many credit facilities are variable rate loans — which exposes the firm to interest rate fluctuations down the road. Consider arrangements that allow a portion or the entire loan to have a fixed rate. Some credit facilities are structured as revolving credit agreements where lending is based on a percentage of eligible receivables billed and unbilled. In these cases, make certain the firm and lender have a clear understanding of what collateral is ineligible and that you know if the lender requires any limits due to concentration risks associated with large receivables.

Most loan agreements require the firm to submit either audited or reviewed financial statements. To save money on professional fees, structure the agreement so that these reports are submitted on an income tax basis. GAAP basis financials are more involved and usually cost more. Often there are other fees that can pass by unnoticed and some may be negotiable, among them unused credit line, arrangement, and annual maintenance fees as well as fees related to collateral bank audits. Ask the lender if there are any prepayment or breakage fees associated with the loan.

Some loan agreements have annual "cleanup" provisions where the loan balance is repaid for a brief period, typically 30 to 60 days. There are other items which may be sticking points to be negotiated. The bank may require personal guarantees or cross guarantees from partners. In some cases, loans may be secured by some or all of the firm’s assets and can be recourse or nonrecourse.

Lenders keep a sharp eye for signs of a healthy firm and anything that demonstrates this will place you in a better light. High marks go to firms that show they have a strong capital position. Low partner turnover and a history of retaining a substantial number of clients are also high on a lender’s checklist.

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