Few words can make you feel overwhelmed just by hearing them, but “debt management” probably tops the list for a lot of people who work in finance, not least at real estate companies. And we get it. Debt Management is often incredibly complex thanks to all the different aspects that need to be taken into account. And that it’s fundamental for the company’s survival doesn’t make it any less overwhelming – but hopefully, we can help you improve your debt management while also making it a bit easier!
To help you out, we’ve put together a list of five things to keep in mind next time you’re doing any debt management work!
- Differentiate Between Financial Risk and Interest Rate Risk
It's easy to get the financial and interest risks mixed up with one another. And sure, both risks are related to your loans. The trick is to think of them in the context of a booming economy versus a recession. As you probably know, in a booming economy, it's both easy and cheap to borrow money. In this type of scenario, more actors want to lend money, leading to lower credit margins. At the same time, the central banks' job is to maintain price stability over time. So, to ensure that a booming economy doesn't overheat due to inflation, they can increase the reference rate. That means that the interest will most likely increase if the credit margins decrease.
On the other hand, during a recession, we have the opposite effect. When investors risk losing money, it becomes a lot harder for real estate companies to borrow any money at all – and in those cases where they do get to borrow money, it often comes with high credit margins and disadvantageous terms. In these scenarios, the central banks can stimulate the economy by lowering the reference rate or buying bonds with longer terms to maturity. That way, they can reduce the interest rate on longer terms to maturity in general.
- Agreements With Fixed Maturity Dates and Fixed Credit Margins
Something incredibly important to keep in mind when it's time to borrow money is what the terms and conditions are. To be sure that you'll be able to borrow the money you need and what the cost of borrowing that money is going to be, you need to make sure that your agreement period has fixed terms and conditions.
Three questions that will help you ensure that you have as much control of your debt and risks as possible when signing an agreement with the bank are:
- For how long will you be able to borrow the money?
- Does the loan have a fixed credit margin for the agreement period?
- Is the reference rate a public rate or the bank's internal rate?
- More Knowledge Leads to Better Prices on Your Interest Rate Swaps
The more you know about the market’s pricing, the easier it is for you to make sure that you get a fair price on your interest rate swaps. Since the banks’ hidden margins make it nearly impossible to know if the price they offer you is reasonable or not, you need to know what the current market price is. That way, you can easily compare the market price to the bank’s offer – and use that comparison when it’s time to negotiate. The key here is to gather as much information as possible before the negotiation, putting yourself in as good of a position as possible.
- Minimize the human risk factor with standardized processes
Something that can be easy to forget about when talking about risks related to financing is how big of a role the human factor plays. To err is human, but luckily enough, you can minimize the risks associated with those human errors.
Excel, for example, is a lot of people’s favourite tool in their daily financial work. However, Excel also comes with quite a few serious risks. Firstly, in most cases, only the person who created the Excel sheet knows how to use and interpret it. This quickly puts you in a key person dependency that can become both complicated and expensive. And secondly, Excel is, despite its digital form, actually a manual tool that requires manual input to perform calculations.
The trick here is to standardize your processes throughout the entire company and decrease the manual work as much as possible, for example, by using a treasury management system. This way, you can reduce your dependency on specific key people in the organization and the risk of working with incorrect numbers. And as a bonus, you can save both time and money as vast parts of your work become a lot more efficient.
- Improve Your Internal Control Through Unified Processes
If everyone at the company works in the same system with synchronized processes, no matter if they work with accounting or financing, you can easily ensure that everyone is using the same source of data. That way, it becomes a lot easier to keep the data updated – and you can eliminate the risk that the data used for reporting and analytics differs from the accounted debt and the associated costs.
In other words, common systems and processes create better transparency and allow you to more easily be able to ensure that the numbers you're working with and reporting actually are accurate.
Want to read more about how these five steps can improve your debt management?
Get our guide here!
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