Dealing with loan debt can throw a wrench in your plans for business growth. The effects are clear whenever you sit down to work out a budget for the next quarter or the next year.
If you find that you’re consistently setting aside more than you’d like just to handle high interest rates and loan fees, it may be time to consider refinancing. The process has both advantages and drawbacks for small business owners, and it’s important to understand them all before deciding to refinance your current debt.
The main reason that most businesses refinance is to decrease the amount of revenue going toward loan payments. Interest rates are often so high that it can take several years to start paying off the loan itself. Refinancing can help balance your cash flow by giving you access to lower interest rates and reducing the amount you pay each month.
Finding lower interest rates may be easier after you’ve been in business for a while. Establishing good credit gives you access to more lending options, so you can shop around for the best possible refinancing offer.
Since the market is always changing, you should be able to find new and better deals. For instance, if you took out a merchant cash advance in the past you may be paying sky high rates and refinancing can make your debt more manageable.
The fees involved in refinancing may negate the potential savings in some cases. Be sure that you understand all the payments involved before taking on a new loan.
Costs vary depending on which bank or institution you get your loan from, the amount you’re borrowing and how many parties are involved in the process. There may also be taxes to consider and penalties relating to the terms of your current loan.
Another potential drawback of refinancing is the possibility that it could make your business more difficult to sell in the future. Any remaining debt transfers to the new owner, and if they discover that they can’t make the payments, the sale is likely to fall through. It’s better to consider refinancing when you know that you’ll be hanging onto the business long enough to pay off the debt yourself.
Choosing smart refinancing options leaves you with assets that can be put toward growing your business. The more you grow, the more income you’ll have, meaning that a smaller percentage of revenue will go toward loan payments each month. You may even be able to pay off your debt faster than you expected so that you no longer have to worry about it draining your resources.
Whether or not refinancing is right for you depends on several factors that should be discussed with your accountant. Get a clear understanding of your current financial state and how the advantages and disadvantages of refinancing stack up. The right loan terms will increase your chances of success by supporting positive cash flow and freeing you up to focus on strategies for growth.