Updated: Mar 22, 2022
Learning how to manage debt is a crucial part of running a business. Yet, all too commonly, adverse trading conditions make your existing debt a burden that sucks cash out of the business.
If you want to reduce your debt by making the cost of servicing it more manageable, you can consider consolidating a number of separate loans and/or refinancing a single loan. Consolidating and refinancing are two separate approaches to restructuring your business debt.
WHAT IS DEBT CONSOLIDATION?
Debt consolidation works by combining all your existing loans from several different lenders into a single, larger debt or loan from one provider.
In effect, that provider will pay off the previous debts, leaving you with only a single loan to repay. This new loan could come either from a brand-new lender or one of your previous lenders.
WHAT ARE THE BENEFITS OF DEBT CONSOLIDATION?
There are numerous potential benefits of debt consolidation, including the following:
It can save you the administrative burden and stress of having to deal with several different lenders by gathering your loans into one, more manageable and predictable payment.
It can help lower the monthly cost of servicing these debts, especially if you can obtain a single loan at a lower interest rate.
Even if you can’t obtain a lower rate of interest, a new loan with a longer repayment schedule might reduce the monthly payment, helping your cash flow in the short term. Though by extending the number of months you’ll be paying interest, you will pay back more overall.
WHAT IS REFINANCING?
Refinancing involves taking out a new loan to pay off an existing loan. Restructuring your loan in this way can get you:
a lower monthly payment
a longer (or shorter) repayment term
a more convenient payment structure
Unlike debt consolidation, refinancing doesn’t require you to have a number of outstanding debts, as you only need one existing loan to benefit.
WHAT ARE THE BENEFITS OF REFINANCING?
Refinancing can provide greater flexibility in dealing with your debts. For example:
A refinanced loan with a longer-term than your original loan can reduce your monthly payment. This will leave you with more cash to invest in your business.
A refinanced loan with a longer-term and a larger principal can keep monthly payments the same while you borrow more.
If you manage to obtain a lower interest rate and the same repayment term, you can save money each month and also reduce the overall amount you repay as you will accrue less interest.
Of course, you’ll need to check the fees the new lender charges, as well as any prepayment penalties from your original lender. You could also check the prepayment fees from the new lender, just in case you later decide to refinance again.
Refinancing allows you to unlock valuable working capital against assets that your business owns e.g. equipment and vehicles. One advantage is that you don't have to own the assets outright, the lender will base their decision on the equity you have currently. If you would like to check your eligibility or would like more information regarding refinancing, then please click the following link: https://www.approvedbusinessfinance.co.uk/asset-refinance
SECURED & UNSECURED LOANS:
When consolidating or refinancing business debt, you’ll come across two main types of loans: secured and unsecured.
A secured loan is the most common. For this, you’ll need to offer collateral (security), such as property, vehicle or other major assets that belong to you. Secured Loans can also come in the form of Asset Finance, which is covered later in this article.
If you’re unable to meet the monthly repayments set out in your agreement, the lender can reclaim their debt from the asset you’ve put forward as security. This usually means selling off the asset to pay off the debt.
With an unsecured loan, you don’t need to provide collateral so you’re not putting any of your other assets at risk.
However, this makes the loans harder to obtain, and you might not get such good repayment terms. To be offered an unsecured loan, you’ll usually need a very good credit history.
Business loans will allow you the flexibility to use the funding as and where your business requires. Often used for growth, loans can also be beneficial for consolidation or special projects. If you would to check your eligibility or would like more information regarding business Loans, then please click the following link:
Asset finance can relate to a range of 'soft' and 'hard' assets. Equipment, machinery and vehicles can all be purchased for your business using this funding option. You can also release equity from an existing asset you already own.
With Asset Finance you can also preserve valuable working capital by purchasing equipment, machinery or vehicles with affordable monthly repayments.
If you would like to check your eligibility or would like more information regarding asset finance then please click the following link:
British Business Bank. 2021. Consolidating and refinancing business debt. [online] Available at: <https://www.british-business-bank.co.uk/finance-hub/consolidating-refinancing-business-debt/> [Accessed 24 November 2021].
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