For businesses to survive and thrive when faced with difficult times, improving their finances is imperative. One day a company can be at the top of its game, only to be hit with changes in the economy or be dealt with a cash flow crunch. When this happens and it’s time to better their finances, debt refinancing could be their best option:
What is Refinancing?
When it’s time to improve a business’s finances, refinancing it’s high-cost debt is usually a term that many hear about, but some don’t fully understand the actual process. Do you really know what it means to refinance your business debt? If you don’t know, refinancing means either consolidating several loans into one or swapping one loan for another with different repayment terms. When a business refinances its debt, the ultimate goal is to lower the loan payments, thereby improving cash flow and giving the business more working capital.
There are times, however, when refinancing is not the best option for a business. If a business is suffering under its current debt repayment schedule now, refinancing should be on the table- and the sooner, the better. To know if refinancing is the right option for your business, it’s imperative to conduct a thorough cost and benefit analysis. This will help determine if refinancing is the right solution for you and your business in the long run.
Understanding Debt to Income Ratio
Finding a reasonable rate when refinancing your debt can be difficult if you do not understand what debt to income is. When a business is looking to refinance, lenders evaluate how they stand financially by their debt to income ratio, which is the amount of money that the business owes compared to their income as a percentage. This is the crucial deciding factor in whether or not to issue a loan, indicate how stable a company is, and how affordable their current loans are. The higher the ratio, the more likely lenders will fear the business will not be able to repay their loan.
What lenders tend to favor is a debt to income ratio of 50% or lower. If your business’s ratio is higher, then is viewed as a higher risk. This means you could face higher interest payments and stricter repayment terms.
However, even if your ratio is on the higher side of the scale, there are still viable options for your business. Whether your business is experiencing or fearful of having cash flow issues, refinancing your high-cost, daily or weekly debt for lower payments could be a good move. Even if that means the new loan takes longer to pay off and the total cost is higher, there are still options for you.
Find the Best Representation
To pick your struggling business back up off its feet, it’s imperative to have someone there to help you through. It takes hard work and dedication to improve your finances, making it easy to feel overwhelmed and in over your head. Debt refinancing is a much better experience with the right company helping you through and ensuring your business has a brighter future. Remember, in the end, if the math behind a debt refinancing isn’t viable for your business, you may very likely find it attractive to still pivot into a debt restructuring strategy instead.
This article was originally published on BarryKornfeld.net
Barry Kornfeld 