When should a company consider refinancing?

Refinancing isn’t simply just for companies suffering from financial difficulties. In fact, it’s a great strategic tool that could be used to free up some cash to pursue your business goals.

For instance, if you are looking for favourable interest rates, you might want to consider refinancing your debts. The additional cash can help you deal with sales fluctuations, financing a new project, or marketing a new product.

If you’ve taken a loan for your business and your credit rating has improved, you could find a facility that offers better interest rates, and terms

To manage your finances, it’s important that you have a clear understanding of your business financials and cash flow. Take a closer look at your current debt, inventory, payroll, and other operating expenses. If you still feel like you are facing cash flow issues, then it’s time consider refinancing your high-cost business debt.

3 reasons why your business should consider refinancing

1.     Reduced Monthly Payments:

Refinancing your business debt allows you to reduce your monthly payments. When done properly, refinancing can cut your monthly payments by 50% to 80%. In a nutshell, lower monthly payments means improved cash flow which helps the business bag more money for investments etc.

2.     Low-Interest Rates:

Another great reason to refinance your business debt is to decrease your interest rate. When your business opts for debt with higher interest rates, it can increased the pay back date of your loan. Sometimes, businesses are forced to extend the term of their loan which can drive the business to the point of bankruptcy.

Nevertheless, with lowered interest rates, the business could save money and in some cases also use the savings to pay off the principal debt which in turn results in a shorter payment term.

3.     High Credit Score:

Loans and maxed out credit cards do come with the benefit of providing your business with a high credit score. But, what does a high credit score have to do with your business?

Often times, a low credit score is the main reason why businesses can get their hand on affordable loans. Thus, paying off high-cost business credit cards and loans improves your credit score and reduces your credit utilisation ratio (the amount you owe vs. the total amount of credit available).

What are the reasons not to refinance a loan?

There are several reasons not to refinance a loan. One reason is the cost related to refinancing, which can include closing costs, application fees, and other expenses that may outweigh the potential savings from a lower interest rate.

If you plan to move or sell a property soon, the time it takes to recoup these costs might make refinancing less beneficial. Additionally, refinancing can extend the loan term, resulting in more interest paid over time, even if monthly payments are lower.

If your credit score has dropped since you took out the original loan, you might not qualify for better terms, making refinancing a bad idea. Finally, if you are close to paying off your current loan, refinancing might not make sense as the potential savings are likely to be minimal.

In short, refinancing your business debt can be your way to increase your profitability. However, bear in mind that like regular loans, there are closing costs associated with refinancing. Therefore, review all the different features and costs of your new loan including the following factors;

•      Total Cost
•      Terms of Use
•      Annual Interest Rate
•      Total Finance Charges
•      Service Fee
•      Debt Reduction Fee
•      Listing Fee
•      Closing Costs

After reviewing all the factors, if you find the total cost for the new loan lower than the current one, then refinancing is a worthwhile step.

Not sure whether you should refinance? Try our refinance calculator today and find out