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Many people use the terms debt consolidation and debt refinancing interchangeable, but they are not the same. This difference is important when you are speaking with potential investors. In short, debt refinancing replaces one loan with another one. Debt consolidation replaces a group of loans with a single loan.
What Type of Debt Can be Refinanced?
The following are the most common types of conventional business debt that can be refinanced.
Term loans
Term loans are no longer helping the business, so they are usually refinanced. For example, the term length or interest rate may no longer match your needs.
Merchant cash advances
Cash advances have short term terms at high rates. It can be dangerous if you do not manage it correctly. The situation can become serious if the business has more than one cash advance. Cash advances are commonly refinanced through debt consolidation. This approach provides for a lower payment and more affordable terms.
Equipment loans
Some businesses have several equipment loans. They each have its own rate and terms. In some cases, you can consolidate them into a single loan and simpler payment terms.
Shareholder Loans
Shareholder loans can be very helpful under the right circumstances. However, they can also outlive their usefulness. Properly executed and maintained shareholder loans can be refinanced with a better-suited option.
How to Get a Refinancing Loan
Refinancing a loan is simple but does require a lot of work. Below is a summary of steps to take to get the loan.
Initial loan consolidation
The first step is to have an initial consultation with the lender. This step helps determine if the lender and their offer is a good match for your situation.
Gather documents
You will need to gather the needed information. Every lender requires that you provide information so they can examine your business. The following information is what you will need to gather:
- Personal and business tax returns
- Personal and business financial statements
- Business debt schedule
- Projection of future sales
- Payment history for loans being refinanced
Qualification Requirements
To apply for a refinance loan, your company needs to have the following:
- A minimum of $500,000 in debt
- Operational history of 3 years
- Equipment and/or real estate
- Up-to-date taxes or a payment plan
The owners also need the following:
- Reasonable credit
- Up to date on taxes or have a payment plan
- Cannot have defaulted on a federal loan
The business needs to be:
- Up to date on taxes
- Must be profitable
- Cannot have defaulted on a federal loan
What is the Right Choice for Your Company?
Depending on the situation, the benefits of refinancing your debt are clear-cut. An obvious example is a company with a heavy debt burden imposed by multiple cash advances. In this case, debt consolidating is the right choice.
If you are unsure, you should do a careful financial analysis. Examine your financial statements and determine the impact of existing debt in your business. Run a forecast to establish the effect of the new debt load in your business. Lastly, decide if the company would be better off. Ask the question, “Will the new debt support future growth?”
Consider consulting with a CPA with experience in business financing. They should be able to give you the best advice on how to proceed.
The Bottom Line
So, which works better? Debt consolidation or debt refinancing? It depends on your circumstances as you can see. Do you owe multiple smaller debts to a variety of different lenders? Do you owe several different forms of the same debt? Then you might be a good candidate for debt consolidation, which can turn those many debts into a single, more affordable, and more manageable debt that you can focus on paying off.
If you want to make a single debt more manageable, then you should refinance. If you can find a better rate and better terms out there somewhere and it is going to save you money in the long run, it makes sense to at least pursue refinancing.
