The Pros and Cons of Debt Refinancing

If your business has been operating for a few years, your company’s financial health might be stronger now than it was in the beginning. You should consider how you are financing your business and ensure that current methods are still benefitting your business’s future.

There is a lot to consider before considering debt refinancing. In this article, we will discuss what debt refinancing means and how to the pros and cons. You will then be able to decide if it is right for your business.

What Is Debt Refinancing?

If you have received a business loan, you can apply for a new loan with better rates and terms. You can pay down the previous loan so that is considered pay off.

Pros of Debt Refinancing

Freed Up Cash Flow

If you can refinance business debt to a lower rate, you can get a lot of cash flow by refinancing. When you have more cash flow, you can re-invest it into different areas such as payroll, equipment, inventory and more.

Extra cash flow can provide more breathing room in your budget, relieving the stress of meeting monthly payments.

More Flexibility

When running a new business, you might not get the best deals with vendors or suppliers. If you survive your startup years, you will have more leverage when it comes to financing.

Pursuing debt refinancing when your business is stable means there will be more options for you to choose in the future. More options mean more flexibility so you might be able to refinance your original loan into one that better meets your business needs.

Reduced Costs

You will face some upfront costs when you close on a new loan if you refinance with a better rate. If the new loan’s rates and repayment terms are favorable., you should benefit in the long term. You should consider all the costs before deciding to refinance so that the deal works in your favor.

Cons of Debt Refinancing

Negative Impact on Credit Score

When you refinance debt, the lender you work with will do a hard inquiry on your credit reports. This may negatively impact your credit in the short term but if you are paying debts in full and on time, it will be negligible over the long term.

It’s Not Right for Everyone

Debt refinancing is not for everyone. There are several factors and costs to be considered. You need to evaluate whether the impact on your credit score is worth it. Although saving money is great, refinancing one debt may not be worth lowering your credit score if it’s going to make it challenging for you to obtain other financing.

It is important to remember that debt refinancing is not the only option. You can pay off your existing loan and then pursue a different type of financing option that will be better for your business. Whether that be credit cards, cash advances, a line of credit, or a loan from a lender with better terms. Conduct research and be confident in the financing route that you’re pursuing.

Prepayment Penalties on Old Debt

If you are not familiar with the world of finance, lenders do not want you to repay your loan early. To discourage you from doing so, they might build prepayment penalties to the loan terms.

The Bottom Line

It is important to remember that it is up to you to understand the financials of the deal before refinancing debt. If you can lay out all the costs and benefits to your business, you will know what to do.