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When Is A Good Idea To Refinance Debt And What Things You Should Consider When Doing So

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Unknown to many, refinancing a debt can benefit your business if it’s struggling or thriving. Whether your business is experiencing seasonal fluctuation, rapid growth, or you want additional capital, refinancing the debt can be a great way to achieve your financial goals and stay afloat.

 

Put simply; refinancing allows you to restructure your existing debt and get favorable terms. It also allows you to leverage your account receivables to replenish your working capital.

 

This discussion explores the circumstances that would necessitate refinancing a business debt and what things you should consider when doing so. Keep reading.

 

 

When Is It A Good Idea To Refinance Debt?

 

Refinancing a debt means applying for a new loan facility with better terms and paying off a previous obligation.

 

Debt refinancing can take several forms, as explained below.

 

1.   Enjoy lower installments

 

First, debt refinancing can be having your lender redeem your existing debt by granting a new long-term credit but with lower installment payments.

 

With a reduced monthly payment, your operating costs will decrease dramatically, thereby improving your cash flow. Notably, positive cash flow indicates that debtors are paying and your liquid assets are improving.

 

Therefore, you can settle current expenses, reinvest or plow back into the business, settle debts, pay your shareholders and have a buffer against future financial obligations. Of course, you may not reap the full benefits of the refinancing, but with good planning and fund utilization, you will eventually reach your break-even point and start savings.

 

2.  Get lower interest rates

 

Secondly, refinancing can be businesses paying off current debts contracted when rates were high and replacing them with a new loan with favorable rates. Notably, this mostly applies to fixed interest rate loans with longer duration.

 

With savings from trimmed interest rates, you can pay off the outstanding balance much faster, resulting in significant savings.

 

3.   Improve credit score

 

Thirdly, it can be an individual or company experiencing bad credit situations and seeking to negotiate better terms with their lender or another institution. Often, lenders are likely to dismiss your credit application if you have a poor credit report.

 

Refinancing can be a good option if you’re struggling to make payments and would like to consolidate existing debts to improve your credit report. You can discuss with your lender on the available options.

 

Things You Should Consider When Refinancing A Debt

 

Here are things to keep in mind when refinancing a debt;

1.   Evaluate your current financial situation

 

Before seeking a debt refinancing, the first thing to do is review your current business situation. You can assess the balance sheet, a statement of your assets and liabilities. A favorable balance sheet position should not have liabilities exceeding the assets. Evaluate your debt level and how it’s affecting the business.

 

Look at the cash flow statement and examine the inflows vs. the outflows. In an ideal situation, the cash inflows should be more than the cash outflows.

 

If you have a cash flow problem, your lender will want you to demonstrate how you plan to mitigate such a situation in the future. To do this, present financial forecasts showing worst case and best case scenarios.

 

2.   Know your debt refinancing options

 

After evaluating your financial situation, you can consider the various refinancing options that could benefit your business.

 

Thankfully, these days, you can access information on the web by looking for nearby lenders. Of course, your banker can be the first option to consider, but some online lenders also offer business debt refinancing facilities.

 

The next thing is to compare various terms, including interest rates and loan tenure. You may be eligible for lower rates if the interest has dropped due to a favorable economic situation. Likewise, if your business shows stable financial performance that puts your lender at a lower risk, you can negotiate for lower interest.

 

Additionally, you can convert your variable rate loan to a fixed rate loan and enjoy lower rates. Ideally, a fixed-rate loan guarantees similar payments throughout the loan tenure. On the other hand, variable or floating rate loans have variations in interest payments depending on the outstanding balance.

 

If you have a poor personal or business credit score, you may have trouble seeking debt refinancing. However, some lenders are willing to grant bad credit business loans if you meet certain conditions, such as a guarantor or security for the debt. Even if they agree to lend you on those terms, your interest rate may be higher, and loan repayment tenure could be short.

 

Even so, it’s advisable to download your credit report and find out if there are items impacting your overall score. Also, you’ll have up-to-date information on your debt situation and find ways to improve it. Credit reports are available for free from the federal website annualcreditreport.com. On the same note, you can improve your score by paying your bills on time, refraining from many credit card debts and adhering to the 30% credit utilization rule.

 

3.   Consolidate your existing debts

 

Now that you know the level of dents, the next step is to consolidate them with refinancing. That way, you’ll have one long-term facility and a manageable monthly installment which can improve your cash flows.

 

Make a list of all your existing financial obligations and decide which debt to pay first depending on their impact on business operation. It’s also possible to combine larger facilities and spread them over a longer term in order to reduce your monthly installments.

 

 

4.   Gather necessary information

 

Finally, gather vital information for your application. Besides your credit report, cash flow and balance sheet documents, you’ll also need the following documentation;

 

  • Tax returns
  • Business plan
  • Accounts receivables and payables
  • Earnings statement
  • Minutes in case of registered companies.

 

Conclusion

 

Any debt can be refinanced, whether a mortgage, consumer loan, business loan or multiple credit card debts. Depending on the type of credit, talk to your lender and discuss the available options. Some lenders may offer credit redemption simulation tools which you can use to discover monthly payments should you decide to consolidate current debts.

 

Remember, debt refinancing is one of many options that you can use to improve your financial situation. Regarding your needs, equity financing, transition debt financing, and term loans are other options.

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