September 15, 2020
Inside: Reasons you should — and shouldn’t — finance your pharmacy debt.
If your pharmacy is running smoothly but steep debt payments are cutting into your cash flow, it may be time to refinance.
By refinancing your debt, what you are actually doing is applying for a second loan and using it to pay off the first, ideally with a better rate or better terms.
Refinancing can help you recalibrate your loan terms so you can focus on investing in your pharmacy without debt payments eating into your cash flow. But refinancing is not always the right choice for every pharmacy.
Here’s what you need to know about refinancing before you jump into the process.
Before you take out a loan to refinance, make sure you know why and how it can help you. These are a few benefits you can reap by refinancing pharmacy debt.
The primary reason most businesses seek to refinance their debt is to get a better interest rate. A lower interest rate means your debt costs less and saves you money in the long run.
Your pharmacy might become eligible for a better rate on a business loan if it’s grown since you took out the first loan. In the eyes of lenders, it has become more reliable, so they are more likely to offer you favorable terms.
If you are looking for cash to reinvest in your pharmacy, refinancing is an ideal option. Instead of taking out a second loan for more funding, refinance your first loan for a larger amount. You can use the money left over from paying off that first loan to grow your business without dealing with multiple loan payments.
Like getting a better rate, taking out a larger loan is more likely when your business has proven it’s stable.
If your current loan is having a detrimental effect on your cash flow, you can refinance for a longer term. That means you have more time to pay off your loan with a lower monthly payment.
The caveat to this strategy is that while you will have a lower monthly payment, you’ll also be accruing interest for a longer period of time, so the loan will end up being costlier in the long run. Take that into consideration before you refinance with a longer repayment period.
Some small business loans come structured with a “balloon payment,” meaning you pay a smaller amount for the first few years of the term, and then make a much larger payment at the end. If you don’t have a large chunk of cash set aside in preparation for the balloon payment, it could end up decimating any cash cushion you’d built up for your pharmacy.
Refinancing will allow you to sidestep that balloon payment and instead pay it out evenly over a long period of time.
If you already have a good grip on your business finances, refinancing loans can give you a little boost. But they aren’t a cure-all for financial woes, and they aren’t the right fit for every pharmacy. Watch out for these red flags before you refinance.
Some loan agreements include a prepayment penalty, which could negate the savings you make by refinancing. For example, Small Business Association 7(a) loans — which are the most common type of SBA loan — come with a prepayment penalty when the loan term is over 15 years.
Before you decide to refinance, make sure you go through your current loan terms with a fine-toothed comb so you know if you will be responsible for prepayment penalties and how much those penalties will cost.
The best time to refinance is when your business is in good financial health. If your pharmacy is struggling, lenders will be less likely to take a chance on you, and if they do, the terms of your new loan probably won’t be favorable to you.
Lenders want to see that your experience has a solid track record — that you’ve been in business for at least one or two years, have healthy cash flow, and your revenue and profit is growing. If your pharmacy is floundering, refinancing won’t be the magic bullet that helps you recover.
One trap small businesses may fall into is refinancing a short term business loan with another short term business loan.
While it may be tempting if you see a deal with a much better interest rate, you actually end up paying interest on the interest from the previous loan. For short term loans, it’s usually more cost-effective to stick it out to the end of the term rather than refinance.
Just like a person, your business has a credit score. Any lender will make a hard inquiry on your credit, which could have a negative effect on your credit in the short term. Refinancing could also have a longer term effect, because it reduces the average age of your credit, which counts against your credit score. If your pharmacy has good credit, refinancing won’t be a huge blow, but if your credit is already low, it might not be in your best interest.
Just like when you secured initial funding for your business, you have a few options for who to turn to for refinancing. These are the most common options for refinancing your pharmacy debt.
Loans backed by the Small Business Administration like the 7(a) loan program are designed with small businesses in mind and often have lower interest rates than a traditional bank loan, making them a good option for restructuring your existing debt.
However, if your first loan was an SBA loan, it’s unlikely that you will be able to refinance with a second SBA loan.
Also keep in mind that the application process for SBA loans is long, and that applications many of them get denied the first time. To ensure you have the best chance at securing one, work on perfecting your SBA loan package.
To refinance, you can turn to your bank to refinance with a standard business loan. You may be able to secure more money from a traditional bank, but they also have more stringent requirements for credit and collateral, so they aren’t always the best option for small businesses.
If SBA loans or traditional bank loans prove elusive during your refinancing journey, there are non-bank lenders that may be willing to step in.
Generally, these come from Community Development Financial Institutions, and they often look to give loans to businesses that will have a positive impact on the community. The requirements aren’t as strict as other types of loans, but do your research — these loans may not have the most favorable terms.
PBA Health is dedicated to helping independent pharmacies reach their full potential on the buy side of their business. The company is a member-owned organization that serves independent pharmacies with group purchasing services, expert contract negotiations, proprietary purchasing tools, distribution services, and more.
PBA Health, an HDA member, operates its own NABP-accredited (formerly VAWD) warehouse with more than 6,000 SKUs, including brands, generics, narcotics CII-CV, cold-storage products, and over-the-counter (OTC) products.
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