Business Analytics

Business Debt Consolidation and Refinancing – What’s the Difference?

Written by Analytix Editorial Team | January 6, 2020

Is your business debt becoming too much of a burden and harming your business credit? Beware! Too much debt with high-interest rates can stifle your business cash flow. In these situations, refinancing or debt consolidating loans make good sense.

Small business owners often confuse debt consolidation with refinancing because the result is sometimes similar. However, they are two different approaches to restructuring business debt. Let’s explore both of these financing options in more detail.

Business Debt Consolidation

Similar to personal debt consolidation, business debt consolidation involves combining all of your multiple existing debts and paying them through obtaining a single loan, preferably at a lower rate of interest. This helps you streamline your business debt by combining multiple debts into one single monthly payment. You more efficiently manage debt and even pay less in the long run.

Loan Refinancing

Loan refinancing is when you take a new loan and use it to pay off the original debt, thus, saving money in the long run and better managing cash flow. Usually business refinance loans have lower interest rates and payment terms which help ease the strain of business debt.

Although the outcomes of both are similar, how do you decide which is the best choice for your business? Well, it depends on the situation.

debt consolidation vs refinancing infographics

When is Business Debt Consolidation Right for Your Business?

If you’re struggling with low profits or high costs and bootstrapping isn’t an option, business debt consolidation is a great idea to stop defaulting on your loans. Business debt consolidation combines various loans into one single principal sum, usually with a lower rate of interest.

This allows you to better manage your cash flow, increase repayment terms, lower your monthly payment, and improve your credit score. But before you proceed, it’s important to determine if business debt consolidation is right for you. Consider:

  1. Business’s year-over-year growth and profit – If your business has grown considerably since you took the original loan, it makes sense to opt for business loan consolidation. Since you’ve been longer in business and grown in your risk appetite and probably built a good track record, your business is more appealing to lenders for favorable loan terms and rates.
  2. Personal and business credit score – Has your credit score increased since you took the original loan? An improved credit score tells the lenders that you have been consistent in making timely payments.
  3. Length of current loans – Are you close to paying off one or more loans? It is advisable to ignore consolidating if you have a business loan that is close to closure, since you may end up losing money on interest.
  4. New loan terms – You must pay attention to the terms of the loan because if the new loan requires you to offer collateral or if the new loan is available at a higher rate, then business debt consolidation isn’t the right choice.

When is Refinancing a Better Choice?

If you’ve got just one high-interest loan that has an unfavorable APR in the context of the present prevailing interest rates, loan refinancing is a better choice to reduce your lifetime interest costs and monthly payments. Refinancing gives you the option to pay less over time for your borrowed capital and give your business the boost it needs to grow.

Loan refinancing with a longer term and larger principal allows you to maintain a monthly payment similar to your current one while borrowing more overall. Also, if you qualify for a refinancing loan with a lower interest rate than your original loan, you’ll save money over time as you accrue less interest.

Before you choose debt consolidation or loan refinancing, make a smart decision by consulting an expert. With an expert by your side, it becomes easier to evaluate additional options and go a long way in helping your business thrive. At Analytix, we can be the catalyst for your business growth and empower you to make the smartest financial decisions.

Next Steps

  • Visit Analytix to learn how we can help your business reach its full potential.
  • Mail or call us at 503.9002.
  • Read more about the latest industry trends on our blog.
  • Follow us on LinkedIn and Twitter for additional opportunities to engage.

Written by

Analytix Editorial Team
Analytix Editorial Team

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