When it comes time to make a change to the structure of your business debt, you have a few options available to you as a small business owner. Each aims to make your debt less of a burden over time and reduce the overall cost to you. If evening out your cash flow or knocking a bit off that lifetime cost of your loan (or loans) sounds appealing, you may want to consider either consolidating or refinancing.
Consolidating and refinancing are two different approaches to restructuring your business loans, though you may (confusingly) hear the two terms used interchangeably. Let’s explore the differences between these two strategies and the unique ways each can help your business.
What Is Business Debt Consolidation?
Debt consolidation involves combining multiple loans into one. You, the borrower, would take out a new loan and use it to wipe out your existing debt, leaving you with only the newer loan to repay. You’d make a single monthly payment (instead of several at different times) and receive a single billing statement.
How Can Debt Consolidation Help My Business?
Multiple loans demanding multiple payments leave little room for lapses in your cash flow. Maybe your business underwent an emergency, and you’re now burdened by previously affordable loans. Or maybe you took out a costly loan (or two) in a pinch, and that steep APR is now hitting you hard. Or maybe you simply want to pay less on your loans in the long run.
Whatever your circumstances, debt consolidation can help quiet the chaos and gather your loans into a single, manageable payment. If you have multiple short-term loans, you can consolidate using a loan with a longer term and (literally) buy yourself time. A loan with a competitive interest rate can help you save big by paying off your old, high-interest rate loans.
If you’re juggling multiple loan products and suspect you could be getting a better deal, debt consolidation could be your best option.
What Is Loan Refinancing?
Refinancing involves taking out a new loan in order to pay off an existing loan for a very specific purpose – for instance getting a better rate on a mortgage or business loan. This newer, better loan replaces your old loan, leaving you with more manageable debt. “Better” in this case means a lower interest rate, a longer term, a larger principal, or some combination of these.
Unlike consolidation, refinancing doesn’t require you to have multiple outstanding debts – you only need one existing loan in order to benefit.
How Can Refinancing Help My Business?
Like debt consolidation, refinancing gives you the option to pay less for your borrowed capital over time and give your business the boost it needs to grow.
A refinancing loan with a longer term than your original loan, for example, can shave down your monthly payment, leaving you with more cash on hand each month to reinvest in your business. Or, a refinancing loan with a longer term and larger principal allows you to maintain a monthly payment similar to your current one while borrowing more overall. If you qualify for a refinancing loan with a lower interest rate than your original loan, you’ll save money over time as you accrue less interest.
Refinancing helps you make bigger strides while growing your business. Like consolidation, it’s a big-picture strategy that prioritizes the long-term health of your business, rather than short-term gains.
What to Consider Before Your Consolidate or Refinance Business Debt
Before you leap into either of these restructuring options, compare how and if your business has grown since you took out your last loan. If neither your credit nor your revenue has improved since then, you may not yet qualify for a substantially better financing option. You may need to wait for business to pick up or your credit to mature before attempting to consolidate or refinance.
As you shop for financing, make sure you’re looking at the APR of various loan products, not just their interest rates – APR includes the additional fees you’ll pay each year and gives you a complete picture of the overall cost of a loan. Consider term length, as well, to understand just how rigorous of a repayment schedule each loan requires.
You should also be prepared for any prepayment penalties from your original lender. Consolidating or refinancing, in this case, counts as “prepaying” and should figure into your decision. Move forward only if the value you’ll gain from restructuring outweighs the cost of the penalty.
Once you’ve evaluated your business’s needs and determined it’s the right time to restructure, it’s time to choose a strategy: refinancing for a single loan, or consolidation for multiple ones. Either option is a proactive step toward strengthening your business financially, trading short-term problem-solving for more lasting solutions. You’ll be laying the groundwork your business needs to thrive for years to come.