Many firms will decide to take on debt at some point, at different stages of growth and for several reasons.
What some business owners may not know is that a business loan they got in the past could be comparatively expensive in the present. This is one of the reasons you might want to consider refinancing business debt before it starts taking a toll on your cash flow.
Consolidating debts — what does it mean?
Refinancing business debt simply means combining multiple business debts into one. It could also mean replacing one loan with another. The fundamental idea behind refinancing is to swap expensive debt for more affordable debt in order to give your working capital a little boost.
Of course, applying for more debt raises concerns about affordability. But, the key thing is to find a facility with suitable terms and rates for your situation. Let’s take a look at three common reasons for refinancing business debt.
Why refinance debt?
There are three main reasons why you might consider debt consolidation: simplicity, savings, and safety.
With multiple loans in place, it’s hard to keep track of your monthly repayments. If you’re already using a tool like Float, things will be a lot easier, but you’ll still have to deal with several different lenders.
Perhaps, over time, your business has accumulated a number of different loans for different purposes. What if you could pay off all those loans with only one new loan to simplify your debt management?
Refinancing could give you one single monthly payment to worry about, and only one lender to deal with. With easier debt management, you can put your mind at ease and focus on what actually matters: running your business.
The most obvious reason to refinance is to save money. By refinancing debt, you may be able to obtain better interest rates or smaller monthly repayments – both of which will help you to boost your cash flow. Lower interest rates help you pay off the debt faster, whereas spreading the same amount over a longer term will reduce the individual monthly repayments.
It’s worth reviewing your debts regularly. Your business may be in a much better position now than when you first took out your loan. If so, you may be able to approach a wider range of lenders and access a lower interest rate than before.
The third reason is safety. Refinancing can help you improve your cash flow and have more working capital that’s not being used for expensive finance. This way you can slowly bring your business into a safer position.
Sometimes, businesses struggle and cash flow gets squeezed. This can feel even tougher when you’re trying to stay on top of a monthly payment. Defaulting on a business debt can lead to serious consequences like CCJs (County Court Judgments) or insolvency, and refinancing can help make things a bit more stable if you’re going through a tough trading period.
Case study: saving with refinancing
One of our customers, a nightclub in London, got into significant debt because of a tricky situation. With under two years of trading history and urgent refurbishment costs, the nightclub owner had to combine loans from different short-term lenders, which led to high repayments every month.
When the business had passed two years of trading history, more options opened up from a wider range of lenders, and the nightclub approached Funding Options for refinancing. We found them a refinance option that replaced the most expensive loans and saved them an incredible £14,000 per month in repayments. This way the nightclub was able to repay the refurb costs at a more manageable level.
It’s important to remember that what may have been a good fit for your business before, is not necessarily a good fit for your business now.
Using cash flow forecasting apps like Float can help you keep track of your business expenses. If you just started enjoying the benefits of Float, and still need to cope with old business debt, try adding different loan amounts and rates into your app to see how it’ll affect your future cash flow. This way you can prevent cash flow gaps and strengthen your trading position. If you’re not sure how to refinance your business debt, Funding Options can help you find the right fit for your situation.
Conrad Ford is Chief Executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. @FundingOptions
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