What You Need to Know Before Refinancing Your Debt
Numerous startups rely on loans to finance their operations, with most settling for high-interest rates during their initial years of operation. Refinancing these loans may be an alternative when you need to scale up your business, with most business owners unaware of the pros and cons of this solution. Below, we discuss whether debt refinancing is right for your business.
Pros of Refinancing
Businesses that survive their initial years of operation will often have a strong financial standing among lenders, building credibility in the long run. In this case, you get more leverage to choose a refinancing option that meets your business’s needs, giving you flexibility for future loan options.
Provides Extra Cash Flow
Refinancing often allows businesses to benefit from a lower interest rate, freeing up essential cash flow that could be used for various day-to-day operations. With this, companies can invest the extra cash in financing needs such as inventory purchases, equipment leasing, and payroll. This makes it possible to lessen the burden on monthly payments, making it easier to manage the business.
Lower Cost of Financing
Debt refinancing may come with upfront costs, but these are often not a long-term concern. Refinancing allows businesses to benefit from lower repayment terms, allowing your business to benefit from a new source of cash flow without strict terms.
Cons of Refinancing
Incurs Prepayment Penalties
Paying off a loan early often comes with prepayment penalties, lowering the savings on your refinancing option. With this in mind, settling for an alternative to debt refinancing may be better, allowing you to benefit from lower repayment terms.
Affects Your Credit Score
If you settle for debt refinancing, your credit report will likely be under heavy scrutiny, causing a poor rating in the short term. This could cause challenges when you need to obtain other financing options for leasing equipment or renting property, making it a problem in the long run. The only solution would be paying for your debt on time, allowing you to get a better rating.
While debt refinancing has its pros and cons, it pays to understand your business’s needs. Freedom Capital Solutions can help provide customized financing for your business, allowing you to get a tailor-made solution. Consider reaching out to us today for your funding needs.