When times get tough for some businesses, they start to consider refinancing their debt. Most of the time, the reason is to cope with changes in the economy, alleviate a cash flow crunch, or even get additional working capital. Although it may seem like the best option, most business owners don’t know how to make it work or get started. Here are some helpful tips for bettering your business’s financing:
Know if Refinancing is the Best Option
To know if refinancing is the best option, it’s essential to have a good understanding of what it is. Simply put, refinancing means either consolidating several loans into one or swapping one loan for another with different repayment terms. When a business refinances its debt, the ultimate goal is to lower the loan payments, thereby improving cash flow and giving the business more working capital.
However, sometimes refinancing is not the best option for a business. There are some cases that a company may be better off financially by sticking with their current loan. To know what is best for your business, it’s imperative to conduct a thorough cost and benefit analysis. This will help determine if refinancing is the right solution for you and your business in the long run.
Find a Good Rate for Your Business
Once you have determined that refinancing your business’s debt is right for you, it’s time to find a good rate. When you start looking for a new loan, it’s essential to keep a clear goal in mind to help compare lenders and find the best deal. To find the best deal, you have to know exactly what lenders will be looking at and how your business will stand up.
Lenders look at the debt to income ratio, which is the amount of money that the business owes compared to their income as a percentage of the business as a key deciding factor of whether or not to issue a loan. This will indicate how stable a company is and how affordable their current loans are. The higher the ratio, the more likely lenders will fear the business will be unable to repay their loan.
What lenders tend to favor for debt to income ratios are 50% or lower. Anything higher will be viewed as a higher risk, which means higher interest payments and stricter repayment terms. If your ratio is on the higher side of the scale, there are still viable options for your business. If your business is 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.
Have the Right People by Your Side
Bettering your business financing can take a lot of work and determination, which is why it’s imperative to have the right people by your side. Debt refinancing can be confusing so having the right company to help you through it can make the process easier and help your business thrive more than ever before. Remember, in the end, if the math behind a debt refinancing isn’t viable for your business, you may very likely find it attractive to still pivot into a debt restructuring strategy instead.