If you're like most entrepreneurs who started a small business, you acquired capital through business loans. Debt financing is, indeed, one of the most frequently used methods of acquiring start-up capital or growth capital. Business financing could come from private loans from family or other investors, bank loans, lines of credit, and even credit from suppliers.
Regardless of the source, debt can build up quickly, and managing the payment on your debts can be challenging. The interest liability chips away at your profitability, while the payments themselves take away critical cash flow from the operations and growth of your business.
With all this in mind, how do you know when it's time to refinance your debt?
Need Better Cash Flow
Debt payments can eat away at cash flow. Even loans that are interest only can become unmanageable if interest rates are too high. If you find that your cash flow is a challenge, it may be time to consider refinancing.
Refinancing your debt can free up extra cash that you can use to pay other short-term accounts payable, cover payroll checks, and even expand your operations.
Interest Rates Fall
Another good time to consider small business refinancing is when interest rates drop. The American economic climate changes from month to month and year to year. Interest rates rise and fall to help keep a stable economy. If you took out a business loan or property loan years ago and find that the current interest rate is much lower now, consider a refinance.
Refinancing your property or business loan may extend the amount of time you have to completely pay off your debt. However, a lower interest rate means lower monthly payments, freeing up cash for your small business now.
Small business owners often find that they encumber many smaller loans on their road to business financing. Having multiple loan payments, all with different terms and interest, adds confusion and costs to the monthly payment processing.
Instead, take all your small business loans and refinance them into a long-term business loan with a single, low interest rate. This makes accounting much easier, and you will likely save on interest payments, adding to the strength of your bottom line.
Time to Renovate
Do you own your own business property? You might add value to your property by building an addition, renovating the space to be more efficient, or even adding certified "green" designs to the structure. Use the new equity in your real property to refinance your existing loan. You may find you could get cash back for your new equity in the property and get better interest rates or better terms on your loan.
Business financing is a strategic game. Small business loans can certainly help you get started, but can contribute to cash flow problems. When you feel that your growth is being handcuffed by your debt burdens, it may be time to strategically refinance. Knowing when you should refinance is a great strategy to free up cash and keep your business operating healthily.