When you make the move towards streamlining your business’ debt, you can explore some effective options, especially if you are a small business. There are two main options for managing your debt: Debt Refinancing and Debt Consolidation. Both options are vital and effective methodologies to organically restructure your company’s finances, especially the loans you have taken out. You may have heard refinancing and consolidation being used interchangeably, but there are some stark differences between them; let’s take a closer look at these.
What is it exactly? Debt consolidation refers to the amalgamation of two or more loans, ‘consolidating’ them into one loan. As a borrower you can apply for another loan and use the loan amount to wipe the current loan(s) clear (to eliminate the need to make several loan payments, covering several loans). What you are going to be left with is the new loan you took to pay for the consolidated one allowing you to only have one monthly loan payment throughout the loan period.
Debt Consolidation Can be a Positive Force for your Business
According to Jared Hecht, founder of @fundera and @groupme, the amount of payments you have to make for multiple loans can have an adverse impact on your cash flow. What if you need to take care of a business emergency but can’t do much about it because of loan payments? This can hamper your liquidity and you may very well need to take out another loan.
You also have the option of taking a more expensive loan. However, now your cash flow is being eaten away by the rising APR. There could be several scenarios where your cash flow can take a bad hit. This is why debt consolidation can get rid of all the chaos and make your loan payments more manageable. For example, if you have two to three short loans, you can take out a larger loan and pay those loans off, buying yourself a little time to manage the new loan.
According to Justin Pritchard who is a CFP at ApproachFP, refinancing a loan involves acquiring a brand new loan in order to make payments for a previous loan, but for a very particular reason or purpose. For example, you can get loan financing to apply for a good mortgage rate or to get a better rate for another business loan.
What loan financing basically does is step in for the previous loan (still outstanding) and grants you more room to manage your debt. The reason why you may be able to manage your debt with loan financing is the fact because the rate of interest on a financed loan is lower. And other factors involved can be an extended principle, longer term or a combination of all three of these factors. To get loan financing, there is no requirement of having multiple loans (unlike debt consolidation). This means you can acquire loan financing even if you have a single loan.
Refinancing Can Play an Instrumental Role in Your Business’ Finances
As per entrepreneur Max Fray who is with debt.org, just like consolidating your debts, loan refinancing can also help your loan payments to be more manageable, making capital payments easier and spreading it over a longer period of time.
Moreover, it gives your operations more room to breathe and expand. For instance, acquiring loan refinancing with an extended repayment plan compared to your old loan can help your monthly payments to become hassle-free. It also gives you the option to have more cash in hand, not affecting your business cash flow every month. In addition, you will also be able to inject your revenue back into the business.
Similarly, you can opt for loan refinancing coupled with a larger principle and extended repayment term. This will give you plenty of time to pay your installments for the old loan and at the same time, enable you to borrow more money.
Factors to Consider When You Make the Decision to Refinance or Go with Debt Consolidation
Before finalizing your decision on either of the debt management strategies, it is vital that you first analyze and evaluate the current financial situation of your business. This is important because you are going to have to qualify for consolidation or refinancing. If your business hasn’t yet improved its credit rating or if you haven’t been able to enhance your credit score, it is safe to say you are not going to qualify for either of these debt management tools.
Fatima Mansoor is a writer at Aepiphanni, a Business Consultancy that provides Management Consulting, Managed, and Implementation Services to business leaders and entrepreneurs seeking to improve or expand operations. She specializes in business & entrepreneurship, digital marketing, and health & fitness. Her focus is on creating compelling web content for small and medium businesses form diverse industries. She mostly writes for entrepreneurs and marketing agencies across the US, Australia and UK.
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