Has your business accumulated several debt obligations that may have terms that are costing your business more money than they need to? Even a healthy business with a great outlook for the future can find itself in a position where business debt refinancing is a smart option going forward.
When a business refinances its debt, it consolidates multiple small debts into a single larger loan from one lender. These multiple small debts may have high interest rates, short repayment periods or costly fees and penalties that make them candidates for refinancing. The single larger loan should cost the business less over time than all of the individual debt instruments that it is replacing. Therefore, when a business is considering refinancing, it is important to have a clear understanding of the full scope of the cost of the current obligations.
Another reason to consider debt refinancing is that it is simply easier to deal with one creditor on a single monthly payment. Because the objective of refinancing is to reduce business costs, the new loan should help a business keep more cash on hand and less flowing out each month. A business must be able to pay its employees and purchase supplies and equipment in order to keep operating efficiently and bringing in more money. It is also beneficial for a business’s reputation to have fewer creditors and be in a better position to pay off debt.
Of course debt refinancing is only helpful if a business reduces its debt obligations by consolidating. It is crucial to carefully examine the terms offered by lenders when refinancing. Not only should a business consider the loan repayment period and the interest rate of the new loan, but it is also essential to understand whether there are any fees or penalties, especially if your business might pay off the loan early. The new loan should not end up costing your business more than all of the individual debt instruments.
Be sure to research the lenders that you approach for refinancing. The goal of refinancing is to make your business more viable in the long term. Not all lenders are trustworthy, and some may take advantage of a business in a precarious financial position.
A business that is best suited to debt refinancing is one with a proven history of operating within a set budget and a record of paying off obligations in a timely manner. Even such businesses can end up with an assortment of debt instruments and would be better off consolidating and refinancing debt under more advantageous terms.
- Financing Blog (24)
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