How to Refinance Expensive Business Debt

Getting a loan with good terms can be difficult for small business owners. New business owners are especially affected by this problem.

Consequently, many small companies have to make do with ‘less-than-perfect‘ financing. They get loans that aren’t well suited for the company and can be very expensive.

Expensive loans become a drag on your cash flow – and often – your time. If your company has this problem, the solution may be to refinance your existing loan with a better one. If you have multiple expensive loans, you can get the same benefit through debt consolidation. Consolidation allows you to replace multiple loans with a single loan with better terms.

What is debt refinancing?

Debt refinancing is the process of replacing a loan that is unfavorable for your company, with a new loan that has better terms. The new loan usually has a lower monthly payment which improves your cash flow. The new loan will lower your interest rate, give you a longer payment term, or both.

Is debt refinancing right for your company?

The best way to determine if your company will benefit from refinancing a loan is to do analyze your financial situation carefully. Look at inflows and outflows and determine what portion of your revenues is going towards paying debt. Then run the numbers again using the rate/term of the new loan. This is the only way to forecast if the new loan will be beneficial. You can start the process by asking yourself these four questions:

1. Is the loan payment taking most of your available cash?

A loan with a large monthly (or weekly) payment may take most of your available cash. This creates cash flow problems and prevents you from operating your business efficiently.

2. Is your interest rate significantly high?

Some companies end up with a high interest loan due to an emergency or other circumstances. Often, these loans have interest rates that are well above the market rate. If the market offers substantially better rates, consider refinancing.

3. Are you juggling payments?

Do you have to juggle supplier payments or delay payroll often? This problem can happen due to a couple of reasons. One  common reason is that your clients may be taking too long to pay. This affects cash flow. If this is your case, consider invoice factoring instead of loan refinancing.

On the other hand, if cash is coming in a timely fashion, your loan may be too expensive and you should consider refinancing.

4. Are you unable to buy new equipment?

If your debt payments is too high, you may be unable to buy new equipment. This has a negative effect on your business since you are unable to buy needed equipment. You may be able to buy new equipment by refinancing your old loan. A new replacement loan is issued for a larger amount – sufficient to take out the old loan and buy the new equipment.

What type of debt can be refinanced?

In principle, you can refinance any business loan. These are the most common types of loans that we see in the market.

1. Merchant cash advances

Merchant cash advances, also known as cash advances, have gained popularity with business owners in recent years. They are very easy to get and many companies have used them when they needed funding.

The problem is that merchant cash advances are very expensive. Furthermore, they are often used to fix problems that can’t be fixed with a cash advance. Consequently, some businesses run into the same problem again even though they got the loan.

Companies that have problems with their cash advances often try to solve them by getting a new cash advance. Basically, they use the funds from the new advance to pay the old ones. This process is called ‘stacking’ and is very dangerous. It often leads to a financial tailspin.

2. Equipment loans

Equipment loans come with a variety of terms, rates and structures. They are a great option and can work very well. However, refinancing an equipment loan may be advantageous if you can get a loan with better terms. Alternatively, you may want to consolidate multiple loans under a single loan, which is easier to manage.

3. Expensive short term loans

These are loans that no longer fulfill the needs of your company because they are either too expensive or for too short a term. These can be refinanced with a loan that is better suited to your company.

4. Loans with balloon payments

This type of financing does not full amortize during the term of the loan. Instead, a large balloon payment is needed end of the term. In this situation, business owners have two options. If they have the funds, the can pay the balloon payment and settle the loan. Alternatively, companies can refinance the loan with one that does not require a balloon payment.

5. Shareholder loans (some)

Shareholder loans can very helpful, under the right circumstances. However, these loans can outlive their usefulness. Of, the shareholder may want to call in the loan. If that is the case, refinancing may be a solution.

Advantages and disadvantages

Debt refinancing has a number of advantages, but also a few disadvantages. Consider these before moving forward with this solution. Refinancing a loan can:

  • Reduce your monthly payment
  • Reduce your rate and/or term
  • Improve cash flow
  • Eliminate old financing with bad terms
  • Help you acquire new equipment/real estate

However, debt refinancing has a couple of potential drawbacks. The first one is incorrect use. This is a problem that can be hard to find. Refinancing an old debt can fix a previous bad financial decision. However, it will not fix a broken business model. You must review the financial state of your company with an expert, such as a CPA.

Also, depending on what product you use, the new loan may have a longer life than the equipment that you use as security. This is unusual, but it can happen.

How to get a debt refinancing loan?

This solution is available to small companies. To be considered, companies:

  • Need at least $500,000 of financing
  • Have 3 years of business history or more
  • Have up to date taxes (or a payment plan in place)
  • Have equipment and/or real estate

Most lenders follow a similar process and have similar requirements. You can get a detailed outline of the general process here.

Need to refinance business debt?

For information about our business debt refinancing and consolidation program please fill out this form – a specialized agent will contact you.