Many businesses, whether they’re performing well or not, eventually stumble upon the need or opportunity to reconsider their financial situation, to see how they are going to survive in the market or simply improve their company’s finances. One way to do this is by refinancing business debt.
In this article, we’ll explore the basics of refinancing business debt so you can get a better idea of what it is, why you should consider it for your business, and how to go about it.
What Is Business Debt Refinancing?
Business debt refinancing is a way for a company to get rid of its current debts by taking out a new loan from the bank. Gathering those debts, which are now at lower interest rates, can save the company lots of money in the long run if they have been paying high interest rates on their loans.
The company can use this new loan to pay off all of its old loans and take away the burden. This process is called debt refinancing or debt restructuring. Refinancing is a common solution in many countries, both on the private market and the business market.
Why and When Should You Refinance Business Debt?
Refinancing business debt can be done for a number of reasons. It is important to assess the risk and the benefits carefully before deciding on whether or not to refinance.
Refinancing can allow you to get better rates and terms for your business’s financing and might be a viable solution both when you’re struggling, or when you just want to seek a better deal.
The most common reason people refinance their business debt is that they are looking for lower interest rates or more manageable payments. Others refinance because they are looking to get a cash infusion by taking out a loan on top of refinancing their other loans.
How to Refinance Business Debt
There are a number of ways to finance business debt. It is important to look at the different options and find the one that will work best for your company:
- One option is to refinance your debt with another lender, such as a bank or another financial institution. This will usually require collateral such as property or shares to ensure that the original lender will be repaid if you default on payments. It can also be called debt consolidation.
- Another option is to securitize your debt through an SPV (Special Purpose Vehicle) and issue bonds (debt securities) in exchange for cash upfront and future interest payments from the SPV’s cashflows.
- A third option is equity-based financing where you give up some or all of your company’s ownership.
Considering all of the above, you should better be able to know whether you would need or could benefit from refinancing business debt.