March 11, 2020

3 Things Commercial Loan Borrowers Should Do When Interest Rates Drop

When it’s all over the news that interest rates have dropped, the first thing many consumers think about is their home mortgage. As a business owner, you may wonder if the news you see from the Fed or your home lender can also provide savings on your commercial loan.

The reality is it’s not as simple as calling your business banker, locking in a new rate, and ordering an appraisal. The commercial banking world has nuances that make the process different than refinancing your house.

Below are three common-sense steps commercial loan borrowers can use to help investigate interest rate fluctuations in the market.

1. Talk to your business banker, with an understanding that commercial rates are very different than residential home loan rates.

There are various factors that go into pricing commercial loans. At times quoting rates is more “art” than science. This a great opportunity to lean on a trust-based relationship with an experienced banker to help you navigate the current market conditions. He or she should have transparent answers to your questions about their bank’s ability to help you take advantage of a lower rate environment.

2. Review the terms of your current loans that are in place.

Specifically, review your promissory note and look for the prepayment language.  Over time, banks have moved toward placing prepayment language in their loan documents as a standard part of the structure terms. If you do have a prepayment provision, go about performing the calculation of the penalty to determine how it will potentially add to the cost of refinancing your loan.

Prepayment provisions can vary – don’t hesitate to call your banker to get the correct calculation. This is especially true if you have “yield maintenance” prepayment penalty, which can give a borrower significant “sticker shock” when they request a loan payoff statement.

3. Make balanced decisions.

A good banker strives to be relationship-focused with their clients. As a borrower, I encourage you to thoughtfully weigh the value of the relationship you have with your bank and banker with any potential lower rate proposal from another bank. Rates will continue to fluctuate and its good business practice to explore ways to save your company money by lowering your cost of financing.

However, there’s more to switching banks than just dollars and cents. The strength of the economy and your industry can also change. Saving some interest cost now by moving to a new bank might not be the best decision for your business long-term if you can’t count on your bank to support you when times get tough. Those that experienced the credit markets during the Great Recession can attest to that.

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