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10 undeniable signs it’s time to refinance your business debt

Business Finance

10 undeniable signs it’s time to refinance your business debt

Updated: August 3rd, 2023

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Small business owners often rely on borrowed funds to execute on expansions, new product testing, and other business-oriented advancements. Fixed-rate loans offer predictability during commonly uncertain times, allowing you to maintain control over your business and steer your operations in the right direction. 

Further down the line, debt refinancing allows businesses to take out a larger loan to cover their preexisting debt while receiving a sum of funding in cash to carry out their new business actions. These can include purchasing new inventory, expanding or remodeling existing facilities, and/or hiring new employees. 

Debt refinancing can consist of a large share of income, regardless of business structure. Some of the best businesses know that they will benefit when they refinance their debts, but that an inability to consolidate business debt from many sources into one or few loans can have a negative impact on business operability.

So what can you do to determine when it’s the right time to refinance business debt, and how can you do it? Here are ten signs for small business owners to know that it may be time for their businesses to consider debt refinancing.

1. Refinance debt when you have an excellent (business) credit score

If you or your business have an exemplary credit score, you may be able to reach out to an alternative lender or bank to receive the funding you need. Whether it is an SBA loan or a fixed-rate loan, small business loans are an excellent way to consolidate and refinance debts, generally with lower interest rates.

2. Good debt-to-income ratio

If the business is making more money than it owes, learning how to refinance business debt can allow the business to retain much-needed growth capital. This is accomplished by reducing interest rates and paying their debts back over a much longer period of time. Having a strong debt-to-income ratio shows profitability and reduces the lenders’ risk in doling out loans. 

3. Interest rates could be lower with debt refinancing

Having several purpose-oriented higher rate loans with smaller principal balances and a few larger loans with lower interest rates may seem appealing until the loans begin growing like weeds. Once they have new roots taking hold, they are difficult to control. 

Acquiring lower credit rates through debt refinancing allows businesses to expand their operational margins which allow businesses to thrive — much like when the U.S. Federal Reserve Board (FED) cuts interest rates for banks and SBA loans.

4. Your business is ready to pay the loan off but faces early repayment penalties

If your business wants to repay a loan now, but you face early repayment penalties, you can opt to combine the outstanding loan with some other forms of business debt, such as business credit card debt and SBA loan debt. When you refinance your business debt, this can allow you to achieve more favorable repayment terms. 

5. Debt refinancing can create more favorable payment terms

Let’s face it — small business owners support most of the American economy, yet they often struggle the most when it comes time to get a loan. Without exemplary personal credit or a history of credit as a small business, loan repayment terms often heavily favor the lender. This can include business credit cards, small business lines of credit, and other forms of flexible funding. 

As time goes on, however, businesses can seek new loans to repay their old loans, often with a better debt-to-income ratio and stronger business credit as a result of having worked with a less-than-ideal loan. Business taxes are one form of debt that can impose unfavorable repayment schedules. By refinancing your business taxes, you can create a schedule that works for you without fearing repercussions by the IRS.

6. Payments are scheduled at inopportune times of the month

Businesses need to control their expense scheduling as much as possible to align Accounts Payable (AP) and Accounts Receivable (AR). If AP and AR are improperly aligned, bills can be paid late, resulting in a diminished business credit score. One solution is for businesses to refinance debts into a different loan with a different payment schedule. 

7. Number of credit streams is hurting the business’ credit score (more than 30% of capital is credit debt)

If your business has more than 30% utilization for capital as credit debt, it looks bad. More than 30% of capital as credit debt can impact your business’ credit score severely. This makes it harder to get a favorable low-interest rate and often results in uncomfortably high interest. 

This is similar to consumer credit evaluations. Swimming in a sea of debt makes consumers less favorable candidates due to questions about their ability to pay back all of their debts on time. Business credit when it comes to how to refinance debt is no different: If your business is relying on loan funding for one-third of their operating revenue, lenders may (rightfully) question whether or not the business will be profitable enough to repay them on time. 

8. Pursue business debt refinancing when payment frequency is not ideal

Beyond payment scheduling, invoice frequency can play a major role in working capital and free cash flow within a company. If the business works on Net-90 but sends payments for tools and loan repayments on Net-30, it can become embroiled in a sticky payment situation very quickly. Some loans have more flexible repayment frequency (e.g. Net-90, biannual, etc.), which makes debt refinancing an attractive option.

9. Growth has started to taper off

Let’s say you’re a once-flourishing business with a scalable model that has tapered off in terms of revenue or other forms of growth. Refinancing a pre-existing loan into a larger loan can help grant you access to more growth capital while also gaining more favorable repayment terms. 

The key when you refinance debts for this purpose is business scalability: Growth capital is wildly variable in its benefit to different businesses. If a Software-as-a-Service  (SaaS) business is missing important features or bug fixes due to a lack of funding, their potential for growth will be stunted despite having a scalable business model. 

10. How to refinance debt when human capital utilization is too high

If employees are working overtime to achieve basic business goals, refinancing business debt to access funding or free up cash flow may be just what the doctor ordered. Debt refinancing can get the hiring cycle moving again, reducing employee burnout potential and increasing productivity simultaneously. 

One area in which this type of capital utilization burns quickly is the gaming sector. Major studios have been known to enforce up to 100-hour work weeks in order to deliver on schedule, rather than bringing more talent in ahead of time. 

Regardless of what type of business you operate, if you need funding, refinancing business debt with alternative lending sources like Funding Circle can be a great way to get the funds you need and make your money work more on your terms. Retaining control over your payment schedules and payment frequency can have a huge impact on both your stress levels and ability to consistently repay your debts.


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