Ride The Line

Entrepreneur, May, 2001 by Doug Hood

...because getting a fixed-rate loan might not be the best fix.

Q: With the recent drop in interest rates, is now a good time to refinance my floating-rate loan?

A: Probably not. It's possible to get a fixed-rate loan, but not all lenders offer that option. If yours does, the initial rate on the fixed-rate loan will likely be higher than that on the floating-rate loan. Also, to avoid keeping their money tied up for long periods of time, lenders usually make fixed-rate loans at shorter terms than when they float with the current rates.

Obviously, most borrowers would prefer knowing they have a fixed payment for a determined number of years to guessing what their payment might be every month. In a falling-rate environment, however, riding the line downward is probably the more sensible option. Once the rates level off, then go talk to your lender. And if he or she agrees to fix the rate, make sure you can deal with the possibility of a higher initial rate.

GETTING PERSONAL

You want a business loan, but your lender wants to know if you are good for it.

Q: Recently, I was declined for a business loan due to some negative personal credit issues, though my business bills have always been paid on time. What does my personal credit have to do with the bank's decision?

A: Quite a bit, especially if it's a new relationship. When you apply for a loan, one of the first things most lenders do is pull a copy of your credit report, which shows how you've paid your personal bills. If you've paid your car loans, credit cards and mortgage on a timely basis, the lender may conclude that you'll pay your business bills on time, too. Whether you're incorporated or not, if there's negative information, they may give you a painful answer.

Banks are usually required to tell you the reason they declined your application, and if their reason includes information in a personal credit report, you have a right to review that information.

You should obtain a copy of your report and review it carefully. It may contain information about someone else or credit issues that have been cleared up but not reported to the credit-reporting agency. Do your best to resolve those issues. Then include an updated report in your next loan request. Be sure to include a written explanation of any past problems, and be honest about your credit in your initial interview with a new lender. It could mean the difference between a quick no or advancement to the next level of review.

Doug Hood is co-founder of Rainmaker Capital Corp., a capital acquisition consulting company in Cartersville, Georgia. Co-founder Marilea S. Hood contributed to this article.