Rising interest rates on loans

loans3One of the first reactions to rising rates is to cap the increasing interest rate on an affected loan. This is where a fixed interest rate can be beneficial, particularly if the rates are expected to keep increasing. The fixed rate stays the same for the life of the loan, unchanging regardless of what the market or indexes do in the future. Thus costs become stable. To take advantage of this option, the original adjustable rate loan will need to be refinanced to a fixed rate loan. The challenge for the borrower is to find a lender who will take over the old loan and replace it with a new fixed one. Applicants can be turned down if the loan looks too risky versus the applicant’s ability to pay.

As a practical solution to a rising interest rate, a borrower can just pay off the existing loan. This of course assumes the borrower has cash to make such a lump sum payment. If so, the loan commitment is eliminated completely. However, this approach can also incur additional costs if there is some kind of penalty for prepayment ahead of the loan schedule.

Just because an interest rate may be rising doesn’t mean it will stay that way. Depending on the index used to base the rate on, a rate that is increasing this year could fall the next year. A borrower needs to make a judgment call to determine if an index-based rising rate will become cheaper in the future. Sometimes the best option may be to do nothing and accept the temporary cost increase. However, with rate changes based on terms such as staggered increases, the logic of riding out the increase doesn’t apply so much since the cost for the rest of the loan life will be more expensive than before.

On the savings side, a rising interest rate is a good thing unless your savings are locked up into a fixed rate. This most commonly occurs with certificates of deposit. If your CDs are locked into a low rate, and the market rate rises significantly higher, it may be beneficial to take the liquidation penalty and close out the old CD to lock in a higher rate with a new CD.

And if you are considering a 5-3-1 commercial loan with the security of federal backing, beware of early payment.

loans1

The 5-3-1 penalty is required on loans of 15 years or longer that are guaranteed by the Small Business Administration under its loan program known as “7(a).”

A business that takes out a 5-3-1 loan is free to repay the balance at any time, but if it voluntarily repays more than 25 percent of the principal within the first three years, it is penalized a percentage of the repayment amount.

For prepayments in the first year after receiving the loan, the penalty is 5 percent; in the second year, 3 percent; and in the third year, 1 percent. There is no penalty after three years.

The clock starts ticking when the first funds from the loan are disbursed–not when the loan is approved.

The SBA requires the 5-3-1 penalty for two reasons. First, 7(a) loans are intended to help build successful businesses in the long term, not to provide short-term cash infusions. Second, the penalty ensures that lenders will make enough of a profit on 7(a) loans that they will continue to write them.

Business debts

Consider legal consequences

Consult with an attorney if the business debt is for a large amount, say $25,000 or more. The attorney can determine if you or the business is ultimately liable for the debt. Provide the attorney with a copy of the credit card or loan agreement, including any collateral. The lawyer should also advise you about measures you may be forced to take if the lender files a lawsuit. Depending on the severity of the debt you could be forced to file for personal or business bankruptcy if the lender files a lawsuit.

loans2.pngWhat will you gamble?

Create a strategy for negotiating the debt based on the liability. Settle the account for the full amount owed if you are personally liable and put up collateral such as your house or other real estate. Further info on pay day loans and personal loans can be found here http://www.jamiespayday.co.uk. Offer to pay the full amount in instalments to avoid foreclosure. Or take a hard stance with the lender if you are a risk taker. Tell the lender you’ll settle for say, 60 percent of the balance in a lump sum, and that you would rather face foreclosure than pay more. This is obviously a risky negotiating tactic that should be tried only with the guidance of your attorney. You could be forced into bankruptcy if the lender calls your bluff.

Are you an LLC?

Take a different position if your business was formed as a limited liability company and is solely responsible for the debt. Under this scenario the lender cannot come after you personally for the debt but can file a lawsuit against the LLC. If you are personally protected by the LLC, negotiate with the lender by offering only what the company can afford to pay. Review the LLC’s current financial situation with an accountant to determine how much you should offer. The lender may be willing to settle the debt for pennies on the dollar if it is an old debt. No matter the age, you should try settling for less than the full amount due if you have no personal liability,

What’s involved with corporate debt recovery?

Bad debt represents non-collectable customer accounts. It is otherwise known as doubtful debt. A company must reduce bad debt levels to improve working capital ratios. Working capital measures short-term liquidity and equals current assets minus current liabilities.

A firm must recover, or collect, corporate bad debt to improve profitability indicators, such as return on equity and gross margin. Return on equity equals net income over total revenue. Gross margin equals sales minus the cost of goods sold divided by total revenue.

To record debt recovery, an accountant debits the allowance for doubtful accounts and credits the cash account. In accounting parlance, debiting an asset account, such as cash or inventories, means increasing its balance.

An accountant reports bad debt expense in the statement of profit and loss, also referred to as the statement of income. He reports the recovery of bad debt in the balance sheet.

 

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