When handled properly, debt consolidation can provide significant
assistance in avoiding a crushing debt load. By consolidating a number of
different loans, interest rates can be
reduced. Convenience is another major
draw of consolidation loans. Rather than
pay numerous creditors who are charging varied interest rates at different
times of the month, you can take out one
loan and pay off all of your accounts.
Prior to exploring the possibility of
securing a consolidated loan, however, it
is important to evaluate your financial
position with the help of a CPA. “The
first and most critical thing is to have
clean and accurate financial statements
in order to make a rational decision,”
says Rodney Fingleson, chairman of
Gumbiner Savett Inc.
Smart Business spoke with Fingleson
about debt consolidation, the importance of clean financial statements and
what type of debt-to-equity ratio lenders
want.
How does the debt consolidation process
work?
It is generally a transfer of loans from
different lending institutions to consolidate into one particular loan. Many of
our clients have their charge cards as liabilities on their corporate balance
sheets. They use their American Express, Visa or Mastercard; they use every
kind of loan possible to finance their
operation. This is extremely expensive,
so what we try to do is take all of these
loans, bundle them up into one package
and have a financial institution consolidate the loan at a much lower rate, provided the company is making a profit.
What are the pros and cons of debt consolidation?
The biggest pro is that you can consolidate to a much cheaper rate. For example, many business owners have debt
that is responsible for a whole slew of
interest charges. Consolidation will generally eliminate those high charges into a
much lower amount. Another pro is that a move toward consolidation helps to
save bookkeepers time; rather than
spending hours and hours each month
reconciling every single account, they
can get financial statements to the owners much quicker.
The con is that you have to be careful
of the promises that are made to you by
debt consolidation companies. It is
important to find out which ones are the
true lenders. Oftentimes, people get
caught up with introductory rates to
change their debt and find out much
later on that they are in a worse position.
One has to watch out for these hard
money loans and people who promise to
take care of everything when, in reality,
the situation only becomes worse.
What factors should be considered when
evaluating whether or not to consolidate
debt?
The most important thing is that you
have to have clean financial statements
in order to make a decision. If the books
and records of a company are not updated, it is very difficult to analyze a full balance sheet. It is crucial to have up-to-date financials in order to make a proper decision as to when to consolidate and
when not to consolidate.
How often should financial records be
updated and what specific components are
lenders most interested in?
Monthly financial statements should be
done between two to three weeks after
the month ends. Financial institutions
are looking at current ratios and debt
ratios to see how a company is performing. Their main concern is debt to equity
and whether the company is highly
leveraged in the debt area.
Generally, banks are looking at a 5-to-1
or less debt-to-equity ratio. When you
cross over this ratio, banks get highly
nervous. A great company will have
approximately a 3-1 ratio. If the leverage
becomes higher than 5-to-1, you will
have a rea problem — especially in
today’s lending market — to try and consolidate your debt. A company with a
ratio greater than 5-to-1 will pay a much
higher rate of interest. The risk factor to
the lender is much higher so, in order to
bring down your interest charge, it is
important to reduce your debt-to-equity
ratio.
How should one conduct a search for a firm
that specializes in debt consolidation?
The most important thing is to ask your
CPA to analyze your balance sheet so he
or she can provide you with some
answers. Accountants should be aware
of the potential benefits that can be
derived from debt consolidation and let
their clients know on a monthly basis if
it makes sense for them.
At our firm, we have clients fax us their
monthly financial statements so we can
review them and see if there is anything
that stands out. If we see anything out of
the ordinary or out of balance, we call
the client. It is very important to be
proactive, and the best person to help
you do this is your CPA.
RODNEY FINGLESON is chairman of Gumbiner Savett Inc. Reach him at (800) 989-9798 or [email protected].