4 Options for Maturing Loans

Financing is a crucial factor that influences the growth of any business. Part of smart financing is having a plan in place when your commercial loan matures. What you decide will depend on the type of loan and your company’s situation, but generally there are four options:

1. Pay off the loan. If you haven’t missed a payment, your final payment will be the remaining balance of the loan. For a loan with a balloon payment at maturity (this happens when the amortization period extends beyond the maturity of the loan, so the loan doesn’t fully amortize over its term), the final payment may be much larger than what you’ve been paying each month. Balloon loans frequently are dependent on the sale of an asset, in many instances commercial real estate. When the term ends, the proceeds from the sale of the asset are used to pay the loan in full. If the asset has not liquidated at the loan maturity, inquire with your financial advisor about a short-term bridge loan or extension prior to maturity.
2. Extend the loan. If you need extra time to make your final payment, one option is a short-term extension. Extensions are common for lines of credit and construction loans. Often a lender will write an automatic extension into the note if the construction project falls behind schedule to prevent maturity problems. For lines of credit, the lender will need updated financial information to renew the loan for an additional term. The lender can temporarily extend the line to allow time to review the credit for renewal if the loan matures before updated financial information is available.
3. Renew the loan. Renewals are most common on commercial working capital lines of credit, because businesses maintain these lines to cover short-term cash flow requirements that result from seasonal revenue shortfalls, seasonal inventory increases, asset purchases and other expenses as needed. When the line nears maturity—the typical term is 12 months—the business provides updated financial information, and the lender underwrites the loan as if it’s a new request. Provided the business remains financially sound and the collateral remains sufficient, the line will be renewed for another term.
4. Refinance the loan. You can review your loans on a regular basis to make sure the structure still meets the needs of your company. Economic conditions are always changing, and it is important to work with your financial advisor to make certain your loan terms match your business’s cash generation and growth needs. Common loan refinance options are to consolidate multiple credits into one, or if you have a balloon loan, you may want to refinance/extend the loan to avoid making the large payment at the end of the term.

It is important to begin talking to your financial advisor several months before your loan matures to help determine which course of action is best for you and your business. You’ll want to collect up-to-date financials for your company, including tax returns, balance sheet, profit and loss statements and any appraisals of the collateral. You may also want to run a credit report on your company if you have a Dun & Bradstreet issued D-U-N-S number at www.dnb.com. The goal is to have a plan in place before your loan matures so your business’s finances stay secure.

Bryan Bean can be reached at 615-743-8254 or by email at Bryan.Bean@pnfp.com.