What You Should Consider Before Pursuing Debt Refinancing
Debt refinancing means replacing your old loans with new ones. You’ll get a lump sum of money to pay off your current obligations, then pay it back on a new loan with more favorable terms. Debt refinancing is a popular technique for people dealing with student loan debt. Many college attendees take out private loans before they have a credit history and are slapped with high interest rates. After they graduate, get jobs, and improve their financial situation, loans with better terms become available. Imagine owing $60,000 in student debt with a 10 percent interest rate. If you replace that with a loan at 7 percent, you’ll save thousands of dollars over the life of the contract. You can do the same thing for your business by potentially replacing expensive loans with cheaper ones.
Still, debt refinancing has potential downsides. If you want to refinance business debt, you’ll need to ask yourself a few questions first.
Consider These Four Questions Before Applying for Debt Refinancing:
1. How Bad Is My Debt?
The goal of any refinancing plan is to get your debt payments under control. Think back to when you opened your business – you didn’t have the credit score or revenue needed to qualify for the cheapest capital. Refinancing can simplify your life, but only if you can get better terms. Have a goal in mind like decreasing your monthly payments or lowering your interest rate by 2 percent.
2. How Well Is My Business Doing?
You can’t just refinance by waving a magic wand. You must be attractive to lenders and meet certain requirements. If your business is struggling, getting a better loan could be difficult. The Small Business Administration (SBA) offers loans to companies looking to refinance, but you’ll need a credit score near 700 and annual revenue topping $100,000. Private lenders typically don’t have as rigid of prerequisites, but your business still needs to be in good shape. To apply, you’ll need to collect balance sheets, bank statements, tax returns, your personal credit report, basically everything on paper related to your company. If your credit score is below 600, try to boost it before applying.
3. How Will Refinancing Affect My Financial Situation?
If you choose to refinance debt, be prepared for the following chain of events. Your credit score will take a hit after the hard inquiry and addition of new loans. In addition, your previous lender might not be thrilled about your decision and charge you a penalty for paying off debts early, and your new loan provider will likely charge you origination fees to start. Refinancing debt comes with its own set of complications, and you’ll need weigh the benefits against the risks. Careful calculations are needed to see if you’re coming out on top in the end.
4. Is Debt Refinancing the Best Option for Me?
Refinancing debt isn’t a good idea for everyone. Replacing bad loans with more bad loans (or worse) isn’t going to help your business. Business owners with credit issues can turn to merchant cash advances or credit cards for funding, but a great loan won’t be available until their situation improves. Before making any decisions, it’s important to assess your business’s credit score and financial situation. That way, you can determine if debt refinancing is the right move for your business.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.