Waking up in a cold sweatover those burgeoning paymentson the adjustable ratebank loan you took out for yourc-store? Stop sweating it! With a little preparationand someone to guide you throughthe processyou can probably get a muchlower, fixed-rate payment using one of severalalternative-financing methods.
Frequently referred to by lenders asportfolio loans, alternative financing usuallyrequires that borrowers come up with25% of the loan amount, but even that canbe financed using a “mezzanine” loan thatacts like a second mortgage on a home andallows borrowers to acquire 100% of thefunds they need.
While some traditional banks makeportfolio loans, they are more commonlyoffered by commercial banks, life insurancecompanies, pension funds, creditunions and Real Estate Investment Trusts(REITS), said Mike Baskin, chairman andCEO of Petro Properties & Finance LLC andPetroConsulting Inc. in Coral Gables, Fla.Because the increased cash flow that resultsfrom alternative financing can be used tofund acquisitions, remodeling or expansion,these alternatives not only reduceinterest payments but can fund growthas well.
Baskin , whose companyspecializes in findingunconventionalfinancing formotor fuel marketers,points outthat traditionalbank loansrun from five to seven years, carry floatinginterest rates and leave borrowers with ahuge balloon payment at the end. The insurancecompanies and other portfolio lendersoffer loans that typically run for 20 years andcarry fixed-interest rates, usually half to onepoint below those offered by banks.
“Life insurance companies invest thefunds acquired through premiums paidby their insureds through real estate mortgagedivisions,” Baskin explained. “Mosthave at least a $1 million loan floor and lendbased on appraised value of real estate plusthe amount of cash flow available to repaythe mortgage.”
Interest Rate Diff erentials
The interest on bank loans is often asmuch as 3% above the London InterbankOffered Rate (LIBOR), which is the dailyreference rate at which banks offer to lendfunds to other banks in the London wholesalemoney market, or at the current primerate.
“LIBOR today is 5.32%, meaning a bankloan taken out today would probably be8.32%, and the prime rate is 8.25%,” Baskinnoted, adding that the problem borrowersface with both LIBOR and prime is that bothrates fluctuate, making the actual interestrate the borrower will pay uncertain at best.
In contrast, loans from life insurancecompanies are usually made at a fixed ratetypically 150-200 basis points above the 10-year Treasury bill yield of return, which iscurrently about 5%, meaning that an insurancecompany loan taken out at 150 pointsabove today’s Treasury bill rate of 5.12% is6.6%. To see the monthly payment differencethis makes in a $350,000 loan, take a look atthe following figures:
- Bank LoanLoan Amount: $350,000.00
- Term of the Loan: 5 years
- Interest Rate: 8.320%
- Monthly payments: $7,150.46
- Total interest paid over the life of the loan: $79,027.63
- Alternative LoanLoan Amount: $350,000.00
- Term of the Loan: 20 years
- Interest Rate: 6.60%
- Monthly payments: $2,630.15
- Total interest paid over the life of the loan: $281,236.54
Baskin says that most of his clients optfor a 20-year, fully amortized loan froma life insurance company. “Life insurancecompanies’ lending is very flexible,which is why people like them,” Baskinsaid, noting that if a company wants tofinance 10 stores, a life insurance companycan arrange a separate loan for each store.“The art lies in matching the borrower withthe lender that will best fulfill the borrower’sneeds.”
John Osburn, CFO of PhillipsOil, reported that when his companywanted to consolidate 31 loans takenout at several local banks for groups offive to 10 properties during an acquisitionand development phase, he founda life insurance company loan was thebest choice.
“We’ve seen on average a 200 basispoints savings, much more flexibleterms and a longer amortization period,”Osburn said. “The name of the game forus, as for most retailers, is cash flow.”
Osburn, whose company has 80 storesin northwest Florida, also points out thatobtaining alternative financing is verymuch a marketing process. “There’s a certainbox these lenders like, and you’ve gotto put yourself in it,” he said. “Get in that70% loan-to-value (LTV) range, show historicalcash flow coveragewhen youhave those things it makes getting a gooddeal a lot easier.”
Equity and Sale/Leaseback
Baskin also negotiates other types ofalternative financing for clients, includingequity financing in which the borrowergives some form of ownership, and sale/leaseback arrangements that allow companiesfocused on immediate growth ratherthan the long-term increases offered byowning the real estate. Sale/leaseback isespecially helpful when a company is inactive acquisition mode because it allowsborrowers to receive 100% of the acquisitioncosts. He counsels that the mostimportant part of equity financing isputting an exit strategy in place that ultimatelyreleases ownership from the equitypartner back to the borrower.
Betsi Bixby, CEO of MeridianAssociates, agrees with Osburn that puttingyour best financial foot forward is thebest thing a prospective borrower can do.“The secret to getting money cheaply liesin having the best financials you can possiblyhave,” she said. “If your financialsaren’t the best, the first step is uncoveringthe reasons why,” a task to which Bixbybelieves Meridian’s Coaching Club isuniquely suited. Every company has somestrengths, but most have one or two areasfunctioning below where they should be.
Coaching, Bixby said, fits into findingalternative financing because it helpspotential borrowers improve their financialstatements. She describes a CoachingClub member who found excess inventoryof $153,836 after reviewing the stockinglevels for tobacco, candy, soda, bottledwater and beer in 10 of his 11 stores.
“He realized that by returning theexcess inventory he could pay down hisexisting debt and save $15,161 on his loancosts,” Bixby said.
Baskin stressed that every borrowerneeds to have financial statements preparedby a CPA with good debt-to-equityratios; and will need audited financials forloans in excess of $20 million.
Suzanne Beebe, CFO of Handee Marts,which owns 63 stores in Pennsylvania,Ohio, Maryland and West Virginia, saysthat preparing the information needed toobtain improved financing is time-consuming,but the results are well worththe effort.
“We talked to our bankers, then gatheredthe necessary financial data andsent it to Mike Baskin, who put a packettogether and found us a lender that’sa much better fit for our company,”Beebe said.
Ironically, that lender turned out tobe another local bank, one willing toprovide much better terms. “Once ourformer bankers realized they were aboutto lose our business, they offered a betterdeal,” Beebe said. “We considered staying,but then realized that our new lenderreally cared more about us and about ourbusiness.”
Alon USA scores big with investors.
As a way of raising capital, makingpart or all of your company available forpublic purchase isn’t just for the big guys.Offering shares of a company for sale onthe New York Stock Exchange (NYSE) islimited to corporations with $100 millionor more in market capitalization, but theNASDAQ Stock Exchange lists smaller companiesand even a company with a smallmarket cap of $10 million can be traded onthe Over The Counter exchange (OTC.)
Jeff Morris, president and CEO of AlonUSA, observed that to get on the NYSE, ac-store company would probably need atle
ast 500 stores, but a company with as fewas 10 might get listed on the OTC.
Morris, who headed the six-memberteam that did the road show presentationsfor the company before its initial publicoffering (IPO), said the process oftaking it to the street was fascinating. “Themost interesting part was presenting thecompany to investors, answering theirquestions and seeing their reactions,”he said. “Seeing how that communitywhich hears dozens of presentationsevery weekreacts to your companyand how much money it was willing tobet on us at the end of the day was acompelling experience.”
Investors were clearly wowed byAlon’s strategy of owning refineries,pipelines, terminals and c-storeswithin a limited geographical area. Thecompany’s IPO drew 10 times the numberof buyers it needed at $16 per share,which was the top end of the company’sprojected range. “Being four or five timesover-subscribed is very good, 10 times isexceptional,” Morris said. “Having thembelieve in our company to that extent wastremendously gratifying.”