Even if your business survived the recession, your property values definitely didn’t. You might think that your property values won’t impact your business until you’re ready to sell. But, did you know that they can affect your ability to refinance your mortgage or continue your line of credit?
Beware the Loan to Value Ratio
Many small businesses have significant assets tied up in real estate. So real estate values help determine the overall value of net assets. As real estate prices fall, so does the overall value.
To reduce risk, banks generally want to lend to customers who have higher net asset values compared to the amount of financing required. If you use property as collateral, the bank will appraise it to determine the amount they can loan.
Look Out for Appraisal Time
“If your last appraisal was before the recession, your property value probably isn’t what you expect,” said Kyle Stemple, principal, New Philadelphia office. “If that happens, your bank might hesitate to give you credit, which can hurt your business.”
Banks evaluate loans with the loan to value ratio (LTV). A low appraisal means that you have a higher LTV and less net asset value. Your bank may consider you less credit-worthy and decline extended credit.
Now What?
So, what should you do if you get a low appraisal?
Get a second opinion from a second appraiser. You’ll have to pay for it yourself, but it might be worth it if the first was unjustly low.
Put up additional collateral. “If you need a loan for more money than your building’s worth, you might be able to use other assets as collateral,” said Stemple.
Negotiate. “Be prepared for low appraisals on new construction and existing real property alike – and even vacant land,” said Michael Taylor, principal, Millersburg office. “But your banker also under- stands market conditions. Leverage your relationship to make an argument for your continued credit worthiness.” On this point, Stemple added that, “A good banking relationship should involve open and constant communication. Keep your banker in the loop to avoid surprises in this type of situation.”
Consider the Small Business Administration (SBA). “The banking environment is not like the days of old,” said Taylor. “SBA loans are great for businesses that struggle to negotiate with their bank.” Through its 504 refinancing program, the SBA splits the cost of the loan with lenders. “This is attractive to lenders because it reduces their risk without turning down capital for you,” he said.
Bring in the pros. Talk to your CPA or attorney. Depending on your situation, they may be able to recommend different courses of action or could even negotiate with the bank on your behalf.
A low appraisal doesn’t have to doom your business – just develop a strategy to mitigate its impact.
This article was originally published in The Rea Report, a Rea & Associates print publication, Summer 2012.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.