Simply put, debt refinancing is taking a new loan to pay off the remainder of an old loan.
Although it might sound a bit counterintuitive to use one loan to pay for another, refinancing debt is usually a good idea when the new loan is a better loan (in one way or another). For example, the new loan could save you money on interest rates, expand your available cash flow, give you extra capital for new purchases, and so much more.
3 Best Reasons to Refinance
- Lower Interest Rates
One of the most common reasons that business owners refinance debt is to acquire a lower interest rate.
This is a very popular route when a current loan has a high monthly payment that is eating too far into your cash flows. Refinancing the loan to get a lower rate usually means that you’re monthly payments will drop and you will pay less money in interest over the length of the term.
In other words, refinancing can decrease the cost of your capital. You will now be borrowing the same amount, for less.
- Longer Loan Terms
Another common reason that business owners refinance loans is to spread the loan amount over a longer term. This gives the borrower more time to pay off the borrowed money (plus the interest), meaning that each monthly payment will be less.
Some reasons to look for a longer term might be that your current loan’s payments are too much for your cash flows, you want to lower each individual payment amount, or you want to change up your payment frequency—such as switching to monthly instead of weekly payments.
Regardless of the specific benefit you’re looking for, a longer loan term is one important reason why many of business owners seek refinancing.
- More Capital
Although straightforward, this is another very important reason that business owners seek refinancing.
A new loan can come with a larger pile of cash that can be used to continue growing your company.
When you refinance the old debt, you can ask for a larger loan amount so that you can pay off the old debt and simultaneously invest more capital into your business. This way, you won’t be taking out multiple loans at once or waiting to expand until after you pay off the first loan entirely.
These are some of the big “why’s” behind debt refinancing. It is very common for business owners to find themselves under 1, 2, or even all 3 of these circumstances. If you find yourself in that place, debt refinancing may be a viable option for your business to help your current financial position, while growing your business at the same time.