An Overview of Business Debt Refinancing
Effectively managing a business encompasses many factors, from hiring employees to sourcing materials to operating within a reasonable budget. A business must also contend with debt, and handling those obligations can be one of the trickiest aspects of business. One tool for managing obligations can be business debt refinancing.
In refinancing, a lender agrees to take on all of the individual debt instruments that a business has accumulated and pay off those creditors in exchange for a single monthly payment as part of a new loan vehicle. Refinancing consolidates multiple debts into one loan from a single lender. It can be beneficial for the business, which now only has to make one monthly payment and manage one creditor. It can also be beneficial for the lender, who now has a larger loan on their books and can collect interest as well as principal from the business that received the loan.
However, both the business and the lender need to be careful. Debt refinancing is only beneficial for the business if the terms of the new loan are better overall than the sum total of all the individual debt instruments that were replaced. Businesses should closely review the details of the new loan. What is the repayment period? What is the interest rate? Are there any hidden fees or penalties? In short, will the new loan end up costing the business less? If so, refinancing is a smart option.
Likewise, the lender must evaluate the business and how likely it is that they will repay the loan in full and on time. If the lender considers the business to be a high risk, the interest rate may be higher and the repayment period may be shorter to help protect the lender from default. Most lenders have standard means by which they gauge perceived risk, so a business should expect to see similar terms from multiple lenders.
Another aspect of debt refinancing that is helpful for businesses is that it can increase monthly cash flow and allow a business to keep more cash on hand. Because refinancing should result in a lower monthly payment to your lender, the business lets go of less cash each month. Be sure that your business is operating within a reasonable monthly budget in spite of the additional cash on hand, or else you could end up with more individual debt obligations again.
A business owner can take advantage of debt refinancing to alleviate costly obligations and transition back to a sustainable operating budget. Before doing so, it is crucial to have a clear understanding of the refinancing process and how best to use it to your business advantage.