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Refinancing vs. consolidating business debt

Business credit

Refinancing vs. consolidating business debt

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Updated: Oct 8, 2019

Now that your business is maturing and you have successfully received financing, the time may come for you to explore restructuring the company’s debt. You might realize that you can obtain better terms for credit. Or you might find that managing multiple loan schedules is a time killer that you can’t afford to maintain. In either scenario, there’s a way to fix these issues. 

Two of the main options available are to refinance and consolidate business debt. While both choices involve obtaining a new loan, there are unique features to each of them. Let’s explore the differences between refinancing and consolidating business debt. 

What does it mean to refinance business debt?

Business debt refinancing involves replacing an existing loan with a new loan that has a better interest rate so that you ultimately save money over the tenure of the loan. 

The way it works is the money from the new loan is directed toward repaying your old loan (or loans) and you can focus on repaying a single lender.  

Don’t worry if you don’t have numerous loans on the books. When you refinance business debt, it only requires that you have a single loan. The main objective of refinancing is to receive a lower interest rate on your loan. In turn, this could translate to lower monthly payments, which could free up additional cash for your company’s day-to-day needs such as paying suppliers or payroll.  

Reasons for a business to refinance 

If you find that you’ve got a short-term loan with an interest rate that’s too high, you might want to replace it with a longer-term loan boasting a lower APR. Even though it might take you longer to repay the loan, the monthly payments are likely to be lower over this period. This might be ideal for a business with high daily cash flow requirements because it could free up additional capital. 

Perhaps you were in a pinch the first time you applied for a loan and accepted terms that were not ideal. Now that you are able to reassess that situation, you might find that your cash flow is being constrained as a result of the pricey loan. With some research, you could possibly obtain more attractive terms through business debt refinancing. 

Another possible scenario that would be a reason to refinance a business loan is your credit profile has improved since the first time you accessed financing. While you couldn’t qualify for an online lender with a minimum credit score of 630 before, after building credit history you might be able to do so today. As a result, you could qualify to refinance your business debt with better terms. 

How to refinance a business loan

Refinancing could be achieved through a product such as a term loan with an online lender or bank. If you are refinancing a Funding Circle loan, for example, you must access a minimum of $25K in a new loan – even if this amount surpasses that of your current loan(s). The lender will need to know how the extra financing will be used

You might also consider an SBA loan. 

If you decide to go the SBA route, you might want to consider a 7(a) loan. This product is flexible enough that you can direct the money toward refinancing debt. One limitation is that you can’t take out a second SBA loan to refinance the first business loan. 

And while you could revisit the previous lender, you might also want to explore other lenders. The important thing is that in the end, the decision for your business to refinance leaves you with a superior loan to the original one. 

Debt consolidation

When you consolidate business debt, this also involves receiving a new loan. Unlike refinancing, this new loan is designed to pay off multiple loans that you’ve already taken out. In some cases, you may find that the loan never even passes through your hands and goes directly to your previous lenders. Once you sign on the dotted line, you can focus on repaying a single lender on the agreed-upon date. 

Reasons to consolidate business debt 

Oddly enough, the primary goal of business debt consolidation isn’t necessarily to save money. While a lower interest rate would be an added bonus, the main idea is to streamline debts so your business runs more smoothly. If you are juggling multiple payment schedules, it could get tricky especially as cash ebbs and flows. 

One of the potential benefits when you choose to consolidate business debt is an improved credit score. It’s a lot easier to keep track of a single payment date rather than several at different times during the month. In turn, this can slash the likelihood of seeing your credit score fall as a result of a missed loan payment.  

Next steps 

Before you begin an application for business loan consolidation, it helps to be prepared just like you were for that first loan. Similar to the last time, you’ll want to gather information including your credit score, sales performance as well as projections, financial statements and bank statements. This time around, however, there are also some nuances to the process: 

  • Evaluate how much you already owe
  • Identify who the lenders are. If you are looking to refinance your business debt, find out if this is permitted in the terms of the loan.
  • Determine the various maturity dates of the loans and the repayment schedules. 
  • If you are consolidating business debt, find out if you will be penalized for repaying the short-term early. If there are penalties involved, you must decide whether it’s worth it to include this loan in the consolidation of business debt. It could also be the determining factor in whether consolidating makes sense for your situation. 
  • Decide which business loans you would like to consolidate and tally the final amount
  • Calculate the current APR of the existing loans. The APR includes annualized interest plus fees, and it is the rate that you want to beat if you can. A business calculator could make the process easier. 

The results of this to-do list will help you determine which lenders are appropriate for your consolidation or refinancing of business debt. It should prevent you from wasting time applying for a loan from a lender whose interest rate range doesn’t fall within your needs.

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