Uncertain times call for a measure of certainty—or at least, measures that promote certainty. Small business owners such as yourself have probably already taken a loan, mostly out of necessity and also because it can help you build your credit history and make you loan worthy in future. Whatever your reason, perhaps you have come to a point where you’re wondering if you should consider refinancing your loan.
What is refinancing?
Before you decide to do it, first you need to understand exactly what refinancing a loan means and whether it will lighten or increase your debt burden in the long run. According to Investopedia, refinancing companies involves one of two options: consolidating your existing loans or switching from an adjustable rate loan to a fixed rate loan.
What are the benefits of refinancing loans?
The primary benefit is that, overall, the repayment process becomes cheaper. This can happen in a number of ways as you might consider refinancing your existing loans for a number of reasons.
1. You’re hassled by daily or monthly loan payments and you want to consolidate your debts: Consolidating your loan payments can actually bring down the interest you’re paying or extend the payment period. It can also simplify the repayment process, since you’ll only be making one set of payments. When you choose debt consolidation, you will only be repaying one loan as opposed to multiple loans at different interest rates.
2. You want to trade in your adjustable rate loan for one with a fixed rate: If you took out a loan when interest rates were likely to go up, then you probably signed up for a fixed-rate loan. An adjustable-rate loan allows you to benefit from any dips in future interest rates.
You would typically have signed up for this type of loan if market forecasts indicated a relative decline in interest rates, prompting you to opt for a loan with a flexible interest rate. A fixed rate loan is one in which you pay a fixed rate of interest, to avoid increases in interest rates (if that’s what the forecasts predict).
This allows you to continue to pay the current (comparatively lower) rate, even when the rates start to climb. Most people choose to switch from the former to the latter, especially when interest rates experience an incline.
3. You wish to expand and/or scale up your business: Whether it’s because of debt consolidation or because you’ve chosen to switch to a fixed loan, lower interest rates could mean a spike in cash flow. You could use this money to reinvest in your business and help it grow. There are some issues you need to be aware of as you decide whether to go ahead with the refinancing, such as hidden costs or stiff penalties for late payments. Do your homework before hand, and make the right decision for your business’s financial future.