Ongoing debt management can help to ensure a lending arrangement continues to fit the needs of your business. Here, we examine the most common options: consolidating or refinancing debt.
0
min read
It’s almost impossible to run a small business without incurring debt, with loans, credit cards, and other financial products used to pay for everything – from daily running costs to business expansion. Regardless of how thorough the research was done before borrowing funds, over time situations can change, cash flow problems can arise, and that debt burden can start to overwhelm a business.
Many business owners facing this situation turn to debt management experts to help find ways of simplifying their debt payments, potentially yielding lower payments and better terms. Refinancing and business debt consolidation are vehicles used by businesses to help ease the pressure of debts in what is a fairly common practice in the business world.
There is a difference between the two.
Debt consolidation is a way of turning several debts – such as a loan and a credit card – into a single debt, with the goal of saving money and making the debt easier to manage. The aim of refinancing is to optimise an existing debt by replacing it with a solution that has more favourable terms, usually lower interest rates. Unlike consolidation, refinancing doesn’t require a business to have multiple outstanding debts – only one existing loan is needed in order to benefit.
Before looking to refinance or take out a debt consolidation loan it’s important to have the business finances in order, to give a clear and complete picture, which will help secure the best deal with the best terms for the business.
{{flexi-loan="/components"}}
When cash flow is restricted, or in situations where a lot of business income is being spent on costly monthly debt repayments, the growth potential of the business is restricted. Refinancing or consolidating business debt can reduce the monthly repayments and free up cash flow that can be used to invest in the business and facilitate growth.
If a business is only just managing to stay in the black each month, consolidating the business debts can help to reduce the default risk. The consequences of defaulting on certain types of loans and debts can be considerable, potentially resulting in a County Court Judgement or even the prospect of insolvency.
A refinancing loan with a longer term and larger principal allows a business to borrow more overall while maintaining a monthly payment similar to the current one. Qualifying for a refinancing loan with a lower interest rate than the original loan will also save money over time, as it will accrue less interest.
By paying off an old loan or a collection of different loans with a new loan that has a lower rate of interest, a longer repayment period, a larger principle, or a combination of all three, the business has more cash available each month.
Successful debt consolidation allows a business owner to improve cash flow, which is vital to maintaining profitable operations and free up more working capital, which would have previously been used to pay high-interest rates or debilitating monthly loan repayments.
Having just one single debt with one single provider, rather than multiple loans from a number of different providers simplifies repayments and streamlines the entire process. This gives the business owner greater freedom and more time to focus on the business and its day-to-day running.
Consolidating business debt involves paying down what is owed on the initial loans, i.e., principal, plus interest. So even though the interest rate on a business debt consolidation loan might be lower than the initial debt, a business owner could potentially end up paying interest on top of interest.
Most business debt consolidation loans are long-term loans, with the result that interest is being paid over a longer period of time. Even if the interest rate is lower, the interest paid could be higher over the life of the loan.
Debt consolidation is often seen as a temporary solution to a permanent problem. It can reduce monthly loan payments and interest rates, but doesn’t address the fundamental issue that a business is spending more money than makes. Addressing this may require a change in business strategy to boost cash flow.
More to read on Equity finance
Ongoing debt management can help to ensure a lending arrangement continues to fit the needs of your business. Here, we examine the most common options: consolidating or refinancing debt.
