The prime rate, the interest rate banks charge their best customers, hasn’t been this low in almost 30 years.

Business owners with revolving lines of credit, which typically have variable interest rates tied to the prime, have seen their costs of borrowing decline this year. A loan balance of $100,000 priced at prime + 1% now costs $6,000 in annual interest, versus $10,500 before the rate drops. However, many business owners may have fixed-rate term loan financing which is now priced comparatively high. Should you consider refinancing such debt? The answer is a resounding yes. Let’s look at some key considerations:

Does your loan have a prepayment penalty? A long-term fixed rate commercial mortgage is most likely to have such a penalty. Equipment leases may also have prepayment penalties. If your loan involves a prepayment penalty, contact your financial institution to confirm the actual dollar amount involved. Many prepayment penalties operate on sliding scales with a percentage of the outstanding loan amount charged as a fee, which reduces each year. For example, if you’ve only repaid the loan for a year, you may have a 10% penalty, but if you’re eight years into the loan, you may only have a 2% penalty. It may still make sense to refinance the loan though, depending on the amount of time it’ll take to recover such fees and any other closing costs.

Don’t be afraid to ask the financial institution that has your loan if they’ll reduce your rate. Some loan documents allow provisions for the lender to modify your existing loan rate for a fee, avoiding other closing costs associated with refinancing. When making this decision, the lender will factor in the overall profitability of your relationship, including your depository accounts, with them. If you have loans or depository accounts at other institutions, offer to move them as incentive to reduce your rate. It’s far easier to negotiate when you maintain your accounts with one bank.

Would you benefit from consolidating debt? Not only can you take advantage of lower interest rates, many times you can improve cash flow by consolidating term debt. Consider the amount of time left to be repaid on each loan and carefully choose your new amortization period. Refrain from re-amortizing the loan over a longer period of time than the loans currently in place, unless your goal is to improve your short-term cash flow. If that’s the case, make sure you have a simple interest loan without a prepayment penalty, so you’re able to accelerate repayment once your cash flow improves. Avoid increasing the amount of the loan above the consolidation amount unless it’s absolutely necessary for short-term financing needs.

Your lender can run various scenarios for you, showing you new payment schedules and the impact on your company’s ability to service its debt. The new amortization period will depend on the type of collateral securing the loan and its current value. It becomes more complex when the types of collateral varies among the loans to be consolidated. The lender will then look at offering a “blended” term and interest rate, or an average of the typical amortization periods and interest rate risk associated with each type of collateral being pledged.

How much are the closing costs? Ask for estimates of closing costs associated with refinancing your loan. Typically lenders will charge some type of origination fee along with various other third party closing costs, such as documentary stamps, intangible taxes, recording fees, etc.

If the loan is secured with real estate, closing costs can be significantly higher. Some of the high dollar items include appraisals and environmental assessments. Depending on the amount of the loan, the lender may have discretion to require an update to a prior appraisal and/or environmental assessment, limited scope assessments, or perform evaluations internally versus hiring a third party, saving you thousands of dollars in closing costs. This varies from lender to lender and is greatly driven by the loan amount, amount of equity in the property, environmental issues and other risk factors.

Once you have an estimate of closing costs, simply “do the math.” How long will it take you to recover your closing costs through the money you will save in lower interest payments? Is this a reasonable time? After such a significant drop in interest rates, it’s likely you’ll recover the cost of refinancing quickly. A $1 million commercial mortgage refinanced from 9.5% to 7.5% will result in an approximate savings of $20,000 in interest expense in the first year alone.

If you told me a year ago the prime rate would be 5%, I would have asked you which planet you were from. This is truly a unique window of opportunity to save money and improve your business’ bottom line. Don’t let it pass you by. At the very least, it’s well worth spending the time to determine if it makes sense for you.

Cindy Craft is vice president of
Florida Bank of Jacksonville and
can be reached at (904) 332-7705
or ccraft@flbk.com.