I often I pick up the phone and have a conversation goes something like this.
“Hi, I want a billboard loan. What’s your rate?”
The borrowing rate is an important part but it isn’t the only thing that matters. I’ve had customers chase rate and then get in a liquidity squeeze because the bank or the sign manufacturer insists on being repaid in too short a time frame.
Here’s an example which is based on several actual situations I’ve observed. A small billboard company with cashflow of $100,000/year borrows $500,000 to install digital signs or buy a small billboard plant. The bank offers a $500,000, 6% loan but wants to be repaid in 5 years which works out to loan payments of $115,000/year well in excess of the billboard company’s cashflow of $100,000. This is setting the company up for a loan default. I’ve seen the same thing happen with sign manufacturers who want to be paid in 5-7 years.
If that billboard company borrowed from us it would pay a higher 12% rate but get 10-15 year amortization. Annual debt payments would be $71,000-$85,000 which can be funded easily by cashflow of $100,000/year.
A loan with a great interest rate which bankrupts your company is a bad loan.
