Refinancing Business Loans

refinancingRefinancing business loans can be a great way to increase your cash flow, albeit taking on more debt.

When business loans are refinanced, standard practice is to fund the new loan and pay off the existing loan. Refinancing business loans is a complicated process that involves dozens of people and multiple departments. When business loans are being refinanced to pay off another loan, the transaction becomes even more complex and needs to be professionally coordinated. Paying off current business loans with a new loan consolidating your debt at a lower cost can help increase cash flow, which is especially helpful in an uncertain economy.

Refinancing occurs when a business or person revises the interest rate, payment schedule and terms of a previous credit agreement. Debtors will often choose refinancing when the rate environment has substantially changed causing potential savings on debt payments from a new agreement.

Refinancing involves the reevaluation of an entities credit terms and credit status. Consumer loans typically considered for refinancing include mortgage loans, car loans and student loans. Business investors may also seek to refinance mortgage loans on commercial properties. Many business investors will also evaluate their corporate balance sheets for business loans issued by creditors that could benefit from lower market rates or an improved credit profile.

The current rate environment is typically a key catalyst for loan refinancing however an improved credit profile or a change in long-term financial plans can also lead borrowers to seek new credit terms. A common goal is to pay less interest over the life of the loan. Borrowers may also want to change the duration of the loan or switch from a fixed-rate to an adjustable-rate mortgage, or vice versa.

Refinancing business loans refers to the replacement of an existing debt obligation with a debt obligation under different terms. The terms and conditions of refinancing may vary widely by country, province, or state, based on several economic factors such as, inherent risk, projected risk, political stability of a nation, currency stability, banking regulations, borrower’s credit worthiness, and credit rating of a nation. If the replacement of debt occurs under financial distress, refinancing is referred to as ‘debt restructuring’.

A business loan might be refinanced for various reasons, some of which include:

– to take advantage of a better interest rate
– to consolidate other debt(s) into one loan
– to reduce the monthly repayment amount
– to reduce or alter risk
– to free up cash

To determine if this is an opportune time for refinancing business loans, it’s important to first identify your refinancing goal. Goals can vary from seeking to consolidate business debts to converting business loans from an adjustable-rate loan, a loan subject to changes in interest rates based on changes of a predetermined index, to a fixed loan. The latter is especially relevant for entrepreneurs who want to avoid potentially higher payments when their adjustable-rate loans reset.



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