If you serve business-owning clients, you've likely talked with at least a few of them about the debt they continue to carry. They might have a line of credit from the bank, or a margin loan on securities or perhaps a mortgage on the building. And of course, let’s not forget about credit card debt. How can you help minimize their interest expenses?
Long term, we appear to be in a rising interest rate environment, which means your clients' operating costs are going to go up. Here are a few strategies they can use to reduce the cost of carrying debt:
Converting Variable Rate to Fixed Debt: Your client has a business credit line they're using, but they don’t see themselves paying it off completely anytime soon. What fixed rate is their bank offering on five-year loans? In a rising interest rate environment, it might make sense to lock in a rate along with a built-in payment plan. That way, the line of credit remains available for emergencies.
Transferring Debt: The cost for a bank to get a new credit card customer is very high: According to Forbes, it might cost the financial insitution $250 for just one person, and that was back in 2014. If it's like anything else, it's probable that cost has only risen over time. With this in mind, your client might be able to transfer their outstanding balance on a high interest rate card to another one and enjoy a honeymoon period of low or even zero percent interest rates. However, you should expect the losing bank to find a way to tack on a penalty fee for taking the move. This might be a deterrant to some clients.
Paying the Bank Instead: If your client has a bank line of credit they aren’t using that much and an outstanding credit card or revolving charge card balance, it might make sense to stop paying the credit card company 18 percent and start paying your bank 8. Yes, it’s a floating rate, but the point spread is enormous.
Looking for Other Ways to Save: Your client’s company might own securities, and the financial services firm might let them borrow against these with a traditional margin loan. However, they should know many financial institutions are allowing certain accounts to be designed as collateral and borrowed against via an asset-based lending program. There could be savings there.
Extending a Personal Loan: Some small businesses are really small. Instead of paying high credit card fees while waiting for revenue to come in, the owner might use their own funds to make a loan to the company for the purpose of debt reduction. There needs to be some documentation to establish it’s an official loan, not taking money from one pocket and putting it in the other. However, this could save the small business from paying those high interest expenses.
Recommending these strategies to clients who own companies will ensure they keep their overhead costs down and also portray you as an accounting professional who thinks not only about the past, but about the future as well.
Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.