Business owners and executives typically put in more than their fair share of hours to make their businesses a success. They also focus on making the most of the rewards they receive for that hard work. This time of year, many take the time to study and adjust their personal investment portfolios.
There’s another breed of portfolio-savvy business owners and executives they should watch just as closely. This is the portfolio of credit and other types of credit that companies build to help them achieve strategic goals and smooth fluctuations in their finances.
Many companies build their own loan portfolio over time. In addition to familiar types of loans, such as facility mortgages or vehicle installment loans, a company’s debt portfolio can include business (and sometimes personal) credit cards, financing for company equipment, and leases.
These forms of debt have different purposes and amounts, as well as unique terms and payment structures. While the funds associated with this debt are owed to other organizations, they essentially represent investments in the future of the company. The company’s return on these investments comes in the form of growth and financial stability, which careful use of debt can foster.
Because of this, a company’s debt portfolio can play a crucial role in the business. However, if not carefully managed, this portfolio can become tricky and even dangerous, especially when different departments or locations make their own lending arrangements.
While you might assume that leadership is always aware of all types of debt the company owes, that might not be the case, especially in a fast-growing or complex organization. When the Marion site finances the purchase of a new desktop computer for an administrative assistant, the Winamac branch signs a lease on a new pickup truck, and the Seymour warehouse opens a credit account with its HVAC contractor to replace an air conditioner, they may not have required management approval — but all contributed to the company’s overall debt portfolio.
When business leaders regularly review the commitments their team has made, they’re less likely to be caught off guard by something like an unexpected balloon payment or a hefty over-mileage fee on a vehicle lease. Regular reviews of the loan portfolio also provide information about how well the company is doing. Executives can see if their portfolio is likely to be bigger in a year or if it’s shrinking. Looking at the interest rates they pay allows them to more accurately forecast financial performance and may alert them to opportunities to reallocate debt or expedite repayment or to consider refinancing a particular loan. When overall debt is increasing but there is no corresponding increase in revenue, it signals the need to look deeper to see if something in the economy is causing a problem or if adjustments need to be made.
Simply put, conducting these regular checks minimizes the potential for unpleasant surprises. That’s why I recommend every business conduct formal debt reviews on a regular basis.
With a better understanding of the nature and scope of what your business owes, you may be able to make strategic decisions that put you in a better position. Her Marion manager didn’t pay much attention to the computer maker’s 19 percent interest rate, buying the Winamac vehicle outright would probably have been cheaper than leasing it in the long run, and that balance from Seymour’s warehouse costs 22 percent.
If instead you’d used your company’s line of credit or gotten a bank loan to do all that shopping, you might have been able to borrow everything you need for a little closer to 9 percent, drastically reducing your interest expenses. It would also simplify the debt servicing process – you would make one payment instead of several – and one of your locations would be less likely to miss a payment and hurt the company’s creditworthiness.
Additionally, reviewing your debt portfolio with the help of a trusted commercial banker may be able to identify other strategies that can help you reduce interest costs and improve your control over your company’s loans. Good bankers are more than a friendly source of money – they can also be a valuable source of knowledge that will help your business thrive!
Karen Gregerson is President and CEO of The Farmers Bank, a locally owned and operated bank with 11 bank branches in Central Indiana.
