So, you might want to refinance your business debt but, how would you go about making that work?
Boy, we get that question a lot. There are many reasons why a business owner might find themselves wanting to refinance their debt:
- to cope with changes in the economy,
- to alleviate a cash flow crunch, or
- to get additional working capital.
Whatever the reason, refinancing debt can be a powerful tool to help a business not just survive, but thrive. ?
Refinancing means either consolidating several loans into one, or swapping one loan for another with different repayment terms. The goal is usually to lower the loan payments, thereby improving cash flow and giving the business more working capital. Of course, when a business owner goes to a lender seeking to refinance, the lender’s main concern will center around loan affordability, so it’s important to plan the move carefully.
So, What’s a Good Rate for Refinancing Debt?
Lenders look at the debt to income ratio of the business as a key deciding factor as to whether or not to even issue a loan. The debt to income ratio is the amount of money that the business owes compared to their income. It’s expressed as a percentage, and shows how much money the borrower is putting towards servicing their current debts.
This matters because it indicates how stable a company is and how affordable their current loans are. If ratio is very high, lenders may fear the business will be unable to repay their loan.
So, lenders tend to look for a debt to income ratio of 50% or lower. If it is higher than that, lenders will view the business as higher risk, which means higher interest payments and stricter repayment terms.
However, there ARE still options for refinancing with a higher debt to income ratio.
If you’re currently experiencing, or fearful of having cash flow issues, then refinancing your high-cost, daily or weekly debt for lower payments could be a good move, even if that means the new loan takes longer to pay off and the total cost is higher. That may seem confusing, but if your issue is cash flow and your goal is to get some breathing room NOW, then debt refi may be your best and only option.
So, How Do You Know If Debt Refinancing Is For You?
Make sure that the loan will actually help your cash flow, and that you can definitely afford the new payments. If you’re looking to refinance because you are struggling with current loans, the last thing you want is to end up struggling with the new refinanced loan. It’s difficult to refinance twice in a short amount of time PLUS you need to show stability, otherwise lenders will be reluctant to talk with you.
If you have a high debt to income ratio, then a lot of lenders either won’t offer good rates or won’t be willing to lend to you at all. Local banks that you already deal with are your best bet since they’ll be able to make a more educated decision based on how well you’re managing your current accounts.
However, many business owners we speak with, especially in Construction, Food Service, Transportation and Manufacturing, usually find it hard to get good loan terms from their banks for various reasons. But there are other options.
One option is an SBA loan. SBA loans from the U.S. Small Business Administration are designed specifically for businesses unable to access more traditional loans. The SBA doesn’t lend directly. Instead, it provides loan guarantees to SBA lenders, so that they’re more willing to loan to a small business. We often use SBA loans very successfully for purposes of debt refinancing.
Additional refinancing options will be discussed in subsequent blogs. The bottom line is that debt problems don’t go away on their own, but there are ways to make YOUR situation more manageable for you AND your business. Knowing that there are options available is the first step toward healthier cash flow. If you’re serious, take the time to explore those options. That’s where we can help.
Contact us for more information on how you can refinance your high-cost business debt and lower your payments QUICKLY.