Homeowners aren’t the only borrowers who can refinance their loans for better interest rates. With corporate refinancing, a business can consolidate its debt and replace current loans with a new one with a better interest rate and extended terms.
Many companies pursue this option when they are unable to satisfy current debt obligations while remaining operational. While some types of corporate refinancing may require you to issue equity to pay off some portion of the pre-existing debt, not all do. Whatever the method used, corporate refinancing is also far less devastating to a company’s credit score than a declaration of bankruptcy. And with recent reports showing that 21% of banks have eased their credit underwriting standards, the time to refinance may be now. Overall, refinancing debt offers various advantages for companies struggling to pay their bills.
Benefits of Corporate Refinancing
Although the process of refinancing corporate debt can be complex and initially expensive, the long-term benefits outweigh the disadvantages for many small business owners. One of the best reasons for small and medium-sized businesses (SMBs) to pursue refinancing is to avail themselves of significantly lower interest rates than the ones on their existing loans.
If businesses took on debt during a time when interest rates were high, they may want to refinance. This way, a business’ repayments better reflect current market conditions.
Many small businesses pursue loans guaranteed by the SBA, or Small Business Administration. While the recession kept interest levels high in recent years, rates fell almost a full point in February of 2015. SMBs may want to consider refinancing now to take advantage of these new low figures.
Because businesses that refinance are paying less interest on loans, they have more money available for operating expenses. By changing their debt instruments, many SMBs can convert short-term loans to longer-term ones, which increases their cash flow. The increase in available capital enables businesses to meet monthly obligations such as employee salaries and supplier fees more readily. This last point may seem obvious, but it bears repeating: businesses that refinance have an easier time paying off their lenders. Along with enhancing creditworthiness and company reputation, satisfying creditors goes a long way toward preventing costly litigation in the coming years.
Of course, not all companies opt to refinance because of financial hardship. On the contrary, a business may opt for corporate debt refinancing because its stock has climbed high enough to attract outsiders. In this case, a company can trade some of its equity for a debt reduction. Doing this can boost the health of a company by reducing its debt-to-credit ratio which will allow for future financing opportunities.
While corporate debt refinancing affords small businesses a number of great opportunities for growth and development, unfortunately not all companies will qualify. Just as companies need good credit to qualify for the initial loan, credit scores can have a profound effect on refinancing approval rates. In fact, it may be worth your time to review your credit history and attempt to resolve disputes and inaccuracies before applying. Not only can a poor credit history affect your ability to refinance, but it may also raise the interest rate you ultimately receive. The most desirable candidates for corporate refinancing are those who have taken on a large portion of their debt recently and have proven records of timely repayment and early payoff. If you don’t meet these qualifications, the lender may require you to issue equity or submit personal guarantees.
Corporate Refinancing Considerations
While corporate refinancing offers a number of advantages for qualifying small businesses, owners should be aware that the process involves some drawbacks as well. One serious consideration for SMBs considering corporate refinancing is the fees involved in the process. Along with bank and titles fees, businesses may wind up owing large sums of cash to attorneys, appraisers and even the municipalities in which their operations are based. Additionally, owners may face ongoing fees associated with lines of credit.
Speaking of credit, refinancing corporate debt can have an effect on your business credit score. In most cases, however, the benefits associated with reducing interest rates and boosting cash flow outweigh the slight credit dip that accompanies the act of taking on a new loan. Because payments are lower after refinancing, companies are usually more capable of repaying debts and even achieving early payoffs. In the long run, refinancing old debt can help you secure future loans at a lower rate.
If you’re thinking of refinancing your corporate debt, it’s important to read all the fine print. While an interest rate may seem favorable on first viewing, a closer analysis could reveal that you’re paying more than you think when you tally up annual interest rates and other finance charges. Do your research to make sure your business and credit score will remain healthy after refinancing corporate debt.
If you’re wondering about refinancing your small business loan, don’t rush into that either. Here are 5 questions you should ask yourself before doing so.