When you run a bustling small business, even minor expenses and debts add up fast. Whether you took out a loan to get started or found yourself in debt due to some unexpected hurdles, there’s a good chance that refinancing your business debt might be the answer.
To build a strong financial foundation, you want to ensure that you’re taking the necessary steps to protect your cash flow and grow your business — and refinancing can help.
What You Need to Know About Refinancing Business Debt
Refinancing is when a business takes out a new loan, using those funds to pay off existing debt for a better rate or repayment schedule. This reduces monthly payments by extending the term of the loan or lowering the monthly payment amount itself.
Refinancing can also allow you to pay off your debt sooner or take advantage of other attractive features of the new small business loan. This makes it a great way for businesses to expand their operations and leverage new opportunities without taking on more debt or spending more money long-term on interest payments. But when should you consider refinancing?
Financial Difficulties
Most companies decide to refinance or restructure their debt when they’re in a financially distressing situation and can’t make their monthly payments on time. In this instance, a chance to lower the interest rate or extend their loan term might help them make their payments on time.
Favorable Market Conditions
Financial decisions aren’t the only reason businesses refinance their loans. Companies might also choose to restructure their debt because of improved credit ratings or decreasing interest rates. Taking advantage of favorable market conditions allows them to free up cash for other business operations and investment opportunities.
When You Want to Escape Higher Interest Rates
Refinancing is a great way to escape higher interest rates and save money on your commercial mortgage. It can help you lock in a lower interest rate and monthly payment, enabling you to free up some extra cash each month for more business growth and innovation.
Many businesses in their early stages take on high-cost debt with astronomical interest rates or predatory loans. Without refinancing, predatory loans cause you to pay off your loans for longer than planned, which can redirect funds from important business ventures. Refinancing offers you an out by lowering your interest rates and allowing you to pay off the loan faster, resulting in more savings.
When You Want to Elevate Your Credit Score
Refinancing can help you improve your business credit score in several ways. First, it can help elevate your credit utilization ratio, which is the amount of credit you’re using compared to the amount of credit you have available. If you’re using a lot of your available credit, it can hurt your credit score.
Refinancing can help by giving you more available credit and bringing your utilization ratio down.
It can also help you improve your payment history. A history of late or missed payments can drag your score down. Refinancing can give you a chance to make all of your payments on time and fix your payment history.
Finally, refinancing can help you get rid of high-interest debt. If you have debt with a high-interest rate, it can cost you a lot of money in the long run. Refinancing can potentially eliminate that debt and help you save money on interest.
The Revenue Generation Has Slowed Down
When a business isn’t generating as much revenue as it once was, refinancing can be a helpful option since it helps lower the monthly payments. This can be useful as it provides businesses with the extra funds they need to keep operating.
When You Need to Change Your Payment Frequency
By refinancing, you can change the payment frequency to one that better suits your needs. This can allow you to pay off your debt faster or slower, providing you with some much-needed breathing room by giving you a lower monthly payment. This can help you better manage your finances and make your payments more affordable.
When You Want to Switch to More Favorable Payment Terms
Since refinancing involves taking out a new loan to pay off an existing one, you’re starting fresh with a new payment schedule and term. This will help you pay the debt at an improved rate that’s more aligned with your business’s needs.
Who Should Consider Refinancing Their Business Loans?
Any business that is struggling financially can benefit from refinancing. However, you’ll generally have better results if your main problem is a low credit score. If you’re struggling due to other factors such as high-interest rates or lack of funds, refinancing might not really solve the problem, depending on the situation.
If you own a small business, you may have more than one type of business debt. A good credit score and cash flow is something everyone strives for while running a business, but sometimes debt builds up. In these instances, you can lower your interest rates and gain more flexible terms if you opt to refinance. .