The unpleasant feeling of business debt can haunt you for a long time and not let you sleep. Since you can't run away from debt, a lot of your funds are going there, meaning too little is left to invest in your business' growth.
Since nowadays you have the option to refinance, you may be thinking of applying this method. But is it time for a business refinance? Let's see if this is a necessity.
Business Loan Refinancing – How Does It Work?
The way refinancing works is quite simple. When you apply for it, you will agree to fully pay the business debt while taking a new loan, which is for a longer term but is much cheaper.
The new loan usually comes with a feature that makes it worth refinancing, such as smaller payments, lower APR, less frequent payments, or others. So, refinancing must have a benefit compared to the debt cycle you're in right now.
When Is It Time for You to Refinance Your Loan?
Refinancing shouldn't happen without you thinking about it, or knowing you're in substantial debt that you can't handle. Sometimes it's challenging to figure out whether refinancing is the right thing to do or not.
Also Read: Does Refinancing a Car Hurt Your Credit?
Sometimes you're well-aware that refinancing is your only option, but other times you need to do an extended, careful analysis to see if you're ready.
It's Time to Refinance Your Business Debt If You:
- Need to Consolidate Your Debt
Sometimes, you have multiple debts, and making regular payments on each one can be a real struggle. It's challenging to know which one to focus on, and you might even miss payments on some because you don't have funds for all.
If you need to consolidate your debt, you can refinance business debt, and it will gather all existing obligations into a single loan that you can pay off at once. So, even if you would still have to deal with the debt, it will be easier to manage a single payment instead of multiple ones.
- You Took Out a Pricey Loan
If you needed some quick money and ended up getting a short-term, expensive loan, you'll have a hard time dealing with it. Although these loans can help you when you need money for a small thing, you'll regret your decision when you see the effect they have on your business funds later on.
If this makes it hard for you to handle, you might have to consider a longer-term loan, to refinance and get out of the unpleasant situation.
- You See the Numbers
Sometimes, all it takes for you is to calculate how things are going now, and how things would go if you take out a refinance loan. If you find a refinance source that seems reliable and convenient, try to do the math and imagine how things would be after you take out that loan.
Does the situation look better, or is it almost the same? You need to consider all of these options, and if you don't see a lot of positive change, you should refrain from doing it.
If you have a prepayment penalty for the current debt, and you see that refinancing would make things much better, then that's enough reason to do it.
What Are the Signs Showing that You're Ready to Consider Refinancing?
Are you ready to consider refinancing as an option to ease your business financial hardship, or not? If you don't know what signs to look out for, here's a list that may help you out.
- You've Reached a Business Milestone
If your business is currently going through something big and has reached a specific milestone, then you might have a great benefit if you refinance your existing loan. It could mean that you will get better terms, interest rates, and more.
For instance, if you've reached six figures of annual revenue, this might make you more eligible for certain loans. It means that refinancing will become an option too, and you will be taken into consideration much easier by reliable lenders.
If you've reached two years in the business, this will again present you as more eligible for some lenders. When your business is newer, you're less likely to be trusted since you don't have so much experience with cash flows and so on. After two years, you've gained more knowledge, and you can deal with whatever comes at you.
- Your Credit Score Has Improved
If you had a bad credit score before, it might have been because of the debt you've achieved over time. Usually, this will impact your eligibility when it comes to obtaining a new loan, so it could not be so easy for you to get a refinancing offer.
Nevertheless, once you see significant growth in your credit score, it makes you better in the eyes of potential lenders, so refinancing becomes a possibility for you.
- You've Recovered from a Bankruptcy
Bankruptcy is a horror scenario for any business. You have to go through a lot of stress to recover from it. Not only that, but it appears on your credit report, and because of this, some lenders will not even look at you.
However, after seven years, bankruptcy will no longer be found on your credit report, and it will open a lot of opportunities for loans. If you've reached that milestone and need to deal with some current business debt, refinancing will be in your reach.
To refinance your business loan, you need to be ready. You must be eligible and borrow only when you need it. That means you should only take it if you need to consolidate your debt, for example, if you have an expensive short-term loan, or you see refinancing as a way to change things for the better.