If you’re like many small business owners, you’ve taken on some form of debt to help your company grow. Small business loans can be very beneficial, but repayments can also become a burden. If you’re struggling to repay business debt, consider reorganizing with business refinance loans.
What is refinancing a loan?
To refinance debt, you take out a bank loan to pay off old debts. The new loan covers existing debts to get rid of high-cost, short-term loans.
Usually, business refinance loans have lower interest rates and payment terms than the first loan. The refinance loan extends for a longer amount of time than the original.
For example, you have a line of credit and multiple short-term loans. The debts carry high interest rates and monthly payments. The large payments make it difficult to manage business cash flow. To ease the strain, you refinance business debt with a new loan that has smaller payments over a longer time period. The refinanced loan pays off your original debts and is easier to manage.
Benefits of small business refinance loans
Is refinancing good for small businesses? Though each situation is different, debt refinancing can offer several benefits. Take a look at these business loan refinance advantages.
Better rates
Usually, small businesses refinance debt for one of the following reasons:
- A business owner gets a loan and the repayments take up a large chunk of profits, leading to cash flow problems
- A business grows after getting a loan and is eligible for a better financing option
Refinancing could be a good option if you want to change your loan rates. You end up paying on the debt longer, but the lower rates make repayment manageable. Instead of quickly paying the loan in huge amounts, you pay it off slowly in small portions. If you want to, you can make larger payments on the refinance loan.
Get more capital
You know that to make money, you need to spend money. But, the capital necessary to grow isn’t always available for a small business. If you’ve already taken out a business loan but still need funds, consider debt refinancing.
Taking out multiple short-term debts at the same time might not be a good idea. You end up with more payment responsibilities and additional interest. Business refinance loans let you pay off the original debt and build your business.
The small payments of a business loan refinance option make it easier to manage debt. Refinancing also leaves you with more working capital each month. You can turn your attention to what matters most—growing your business.
Consolidate debt
As a small business owner, you have enough to worry about before owing dozens of creditors. It’s hard to keep up with payment due dates and improve cash flow when you have multiple debts.
Instead of making many payments each month, you can refinance business loans to consolidate your debts. With a small business debt consolidation loan, you move all your loans into one place.
Smaller, short-term debts turn into one long-term loan. The new loan should cost less because the payments are spread out over time. The Small Business Administration offers several debt consolidation loan options.
Improved credit score
Consolidating short-term debts can help your personal and business credit scores. When you refinance debt, you reduce your credit utilization ratio. The credit utilization ratio is the amount you owe on credit cards compared to the total amount of credit available. The lower your credit utilization ratio, the better your credit.
Want to impress your friends at a dinner party?
Get the latest accounting news delivered straight to your inbox.
Guide to refinancing: Things to consider with business refinance loans
Refinancing can be a smart choice for managing business debt. But, every business is different. Consider the following factors before debt refinancing.
Your company’s growth
The size and health of your business play a part in whether a business loan refinance choice is right for you. Take a look at how your business has changed since you got your original loan(s). If you haven’t seen much growth, it might be harder to refinance.
The more your business grows, the more business loan refinance options you have. Usually, new businesses only have access to short-term loans with higher rates.
Meeting business milestones improves your chances for a small business refinance loan. Lenders look at the time in business, credit scores, and yearly revenue when considering loan requests. The general rule is that the higher these items are, the more likely you are to get a small business loan.
How far you are into current debts
If you’re almost done paying off a loan, you might not want to refinance. Instead, consider finishing the repayments on the original loan. If it’s possible, making repayments might be easier than debt refinancing when a loan is almost paid off.
Avoid short-term loans when looking at your debt management options. In many cases, paying off short-term debt with more short-term debt doesn’t work. You lose money on interest and, sometimes, the payment terms make it difficult to get out of debt. Consider refinancing with a long-term loan that allows for smaller monthly payments.
Lender fees
If you’re thinking about small business refinance loans, don’t forget about fees. Lenders often charge fees when they provide a loan. You might have to pay fees on both the old and new loans when debt refinancing.
On top of interest and flat fees, the bank could also charge to evaluate and write up the loan. And, the original lender might charge a prepayment penalty, meaning you have to pay a fee for repaying the debt early. Check that you can afford to refinance before agreeing to another debt.
Need a simple way to track your business debts? Patriot’s online accounting software is easy-to-use and made for business owners and accountants. Try it for free today.
This article has been updated from its original publication date of August 3, 2017.
This is not intended as legal advice; for more information, please click here.
