Debt Refinancing with Large Business Loans: 5 Things To Know

Debt refinancing can be a game-changing decision for businesses seeking to optimize their financial strategy.

When done correctly, debt refinancing can reduce interest rates, consolidate multiple debts into a single payment, and free up cash flow. This financial maneuver allows businesses to reallocate resources that were previously tied up in debt repayment to other areas such as development, expansion, or operational improvements.

For large businesses, refinancing can consolidate multiple loan agreements into a single, more manageable loan. This simplification of debts often comes with the added benefit of a longer repayment period and potentially a more favorable interest rate, which can significantly lower financial stress and increase operational efficiency.

The decision to refinance should come from a thorough analysis of the business’s financial landscape and an understanding of how refinancing fits into its long-term financial goals. Businesses must consider the timing of refinancing, the terms of potential new loans, and the impact on their credit profile. Effective refinancing requires aligning these factors with the company’s strategic financial goals to ensure it supports sustainable growth.

Continue reading for everything businesses need to know about debt refinancing with large business loans. If you’re ready to explore the financing options your business qualifies for, complete our easy application.

Understanding Your Current Debt Structure

Before you seek debt refinancing, it’s important to fully understand your business’s current debt structure. This foundational knowledge helps you make informed decisions about whether refinancing is beneficial and how it can be strategically implemented to improve the business’s financial health.

Types of Existing Debts

Each type of debt carries its own set of terms, interest rates, and repayment schedules, which can significantly impact your refinancing strategy. Here’s a closer look at the common categories of business debt:

• Secured Debt: These debts are backed by collateral, meaning a borrower pledges an asset, such as real estate or equipment, to the lender as security for the loan. Common types of secured debts include mortgages and asset-backed loans. Refinancing secured debt often involves re-evaluating the collateral’s value, which can affect the terms and interest rates offered.
• Unsecured Debt: This type of debt does not involve any collateral. Examples include business credit cards and unsecured business loans, like revenue-based financing. Since these loans carry more risk for the lender, they typically have higher interest rates compared to secured loans. Refinancing unsecured debt might be aimed at reducing these higher interest rates or consolidating several smaller debts into one.
• Revolving Debt: This form of credit can be accessed as needed, up to a certain limit, as long as the account is open and payments are made on time. Business lines of credit and corporate credit cards are typical forms of revolving debt. Businesses often refinance revolving debt to improve interest terms or increase the credit limit.
• Installment Debt: Loans that are repaid with regular (typically monthly) payments over a set period of time fall into this category. Each payment includes interest and principal. Examples include term loans and equipment loans. Refinancing may help to extend the term, reduce payments, or lower the interest rate.
• Commercial Loans: Specifically designed for business financing, these loans can be used for a range of purposes, including operational costs, expansion, and equipment purchases. 
• Bonds: Larger businesses might issue corporate bonds to raise capital. Investors buy these bonds, and are repaid with interest over time. Refinancing bonds can involve issuing new bonds at lower interest rates to replace older, higher-rate bonds.

Assessing Interest Rates and Terms

Making educated decisions about refinancing requires having a thorough understanding of the interest rates and repayment terms on the current debts of your company. Here’s a closer look at how to evaluate these elements successfully:

• Interest Rate Comparison: Start by listing all your current debts, including loans, credit lines, and credit cards, along with their respective interest rates. This exercise helps identify high-cost debts that could be refinanced to lower rates.
• Fixed vs. Variable Rates: Determine whether your current debts are at fixed or variable interest rates. Fixed rates offer predictability in repayments, while variable rates can fluctuate with market conditions. If you have variable-rate loans and predict an increase in rates, locking in a fixed rate through refinancing might save money in the long run.
• Repayment Terms Evaluation: Review the repayment terms of each debt, focusing on the remaining duration, monthly payment amounts, and any flexibility in repayment options. Refinancing might allow you to extend the loan term, reduce monthly outlays, or shorten it, which can increase monthly payments but reduce the total interest paid over the life of the loan.
• Prepayment Penalties: Check for prepayment penalties on your existing debts. Some loans include fees for early repayment, which can negate the savings from refinancing. Calculate these penalties and factor them into your overall cost-benefit analysis to determine if refinancing is financially worthwhile.
• Impact on Cash Flow: Analyze how changing the interest rate or repayment terms through refinancing would impact your business’s cash flow. Improved cash flow can enhance operational capabilities and investment opportunities, whereas tightened cash flow might slow down operations.

The Financial Health Check

A financial health check is important before taking out financing for any purpose. Before you consider refinancing, we recommend going through the following steps:

Evaluate Key Financial Ratios

Having a solid grasp of your financial ratios is needed to understand your company’s financial health and spot any warning signs that could affect your application for refinancing:

• Debt-to-Income Ratio (DTI): This ratio measures the percentage of your business’s gross income that goes towards paying debts. A lower DTI is preferable as it indicates less risk to lenders.
• Debt Service Coverage Ratio (DSCR): DSCR is a measure of the cash flow available to meet annual interest and principal payments on debt. A DSCR of 1.25 or higher is typically considered good, indicating that the business generates sufficient income to pay its debts.
• Credit Utilization Ratio: This ratio shows how much of your available credit your business is currently using. Lenders prefer a utilization rate of 30% or less, as it suggests responsible debt management.
• Interest Coverage Ratio: This ratio indicates how easily a business can pay interest on its outstanding debt with its before-tax earnings. A higher ratio suggests that a business can comfortably meet its interest obligations from its operational earnings.

Revenue Stability

Stable and predictable revenue streams are attractive to lenders because they imply that the business can maintain consistent debt payments:

• Historical Revenue Trends: Review your business’s revenue patterns over the last few years to identify growth trends or volatility that might impact lending decisions.
• Projected Revenues: Future revenue projections are equally important, especially if your business is in a growth phase or entering new markets. Reliable projections can strengthen your refinancing application by demonstrating the potential for repayment.
• Profit Margins: Healthy profit margins are indicative of efficient management and a robust business model, which are key factors in securing better refinancing options. Ensure your financial statements clearly reflect your profit margins over time.

Evaluating Refinancing Options

Choosing the right source for refinancing large business loans impacts not just immediate financial relief but also a company’s long-term financial health. Here, we’ll discuss the primary distinctions between bank and non-bank lenders, providing insights that can help business leads make informed choices in their operations.

Bank Lenders

Banks are the “traditional lenders.” They’re regulated by federal and state laws and known for their stability and comprehensive financial services. Here are some key characteristics of this lender type:

• Interest Rates: Banks often offer lower interest rates for refinancing due to their access to a wide range of financial resources and lower cost of funds.
• Stringent Requirements: To qualify for refinancing through a bank, businesses typically need a strong credit history, substantial collateral, and solid financial statements. The thorough vetting process can be a barrier for some businesses.
• Longer Processing Times: The application process with banks can be lengthier due to rigorous credit checks and manual underwriting processes.
• Relationship Benefits: Having an established relationship with a bank can lead to better terms and personalized service, which can be advantageous for businesses with complex financial needs.

Non-Bank Lenders

Non-bank lenders, including online platforms, alternative financing providers, and credit unions, offer a range of products that might be more accessible to some businesses:

• Flexibility: Non-bank lenders often offer more flexible terms and are willing to take on higher risks, which can help businesses with less-than-perfect credit histories or unique financial needs.
• Faster Approval and Disbursement: These lenders typically leverage technology in their processes, resulting in faster approval and disbursement of funds, which is crucial for businesses needing quick financial relief.
• Higher Costs: The downside of the convenience and accessibility offered by non-bank lenders is typically higher interest rates and fees. The increased costs are due to the higher risks assumed by these lenders.
• Innovative Products: Non-bank lenders frequently offer products tailored to niche markets or specific business models, such as invoice financing, merchant cash advances, or revenue-based financing.

Making the Right Choice

There’s no “best” lender for every business. The organization that’s right for your company will depend on your unique financial circumstances and goals.

Here are a few tips to help you select the lender for your debt refinancing:

Assess Financial Situation and Needs

• Immediate Financial Needs: If your business requires quick access to funds, non-bank lenders may be more suitable due to their typically faster processing times. For businesses that can afford to wait in exchange for better rates, a bank might be the preferred option.
• Financial Health: Evaluate your business’s credit score, financial statements, and cash flow. Banks usually require a stronger financial standing and may offer better terms for businesses that meet these criteria. Non-bank lenders are often more accommodating to businesses with fluctuating revenues or lower credit scores.

Compare Terms Thoroughly

• Interest Rates and Fees: Compare the total cost of borrowing from different sources. While banks generally offer lower interest rates, the fees associated with non-bank loans can add up. Make sure to consider all associated costs, not just the headline interest rates.
• Repayment Terms: Consider the flexibility of repayment terms. Non-bank loans might offer more adaptable terms, which can benefit businesses with seasonal income fluctuations. Conversely, banks may provide more stable, predictable payment schedules, which can be easier to manage in the long run.
• Prepayment Penalties: Some lenders may charge penalties for early repayment. If you anticipate being able to pay off your loan early, seek out refinancing options that do not penalize you for doing so.
• Collateral Requirements: Understand the collateral requirements. Banks typically require substantial collateral, which might not be feasible for all businesses. Non-bank lenders might offer unsecured loans, which could be a decisive factor for businesses lacking collateral.

Consider the Long-term Impact

• Debt Structure: Consider how refinancing will affect your overall debt structure. Will it simplify your liabilities and improve manageability, or could it potentially complicate your financial obligations?
• Future Financing Needs: Think about how the choice of lender and the resulting credit relationship will impact your ability to secure future financing. Building a strong relationship with a bank could facilitate access to larger loans under better terms in the future, while non-bank options might be a quick fix but not contribute to long-term relationships.
• Financial Stability: Assess how refinancing with either type of lender will impact your business’s financial stability. Weigh the potential savings against any risks, such as increased interest rates or more stringent covenants that could restrict your business operations.

Leverage Professional Advice

• Financial Advisors: Consult with financial advisors to understand the nuances of various refinancing options. They can provide personalized advice based on your business’s financial condition and growth prospects.
• Loan Brokers: Consider using a loan broker who can help navigate the complex lending landscape and negotiate better terms on your behalf. They can also offer insights into which lenders might be most receptive to your business profile.

Navigating the Application Process for Debt Refinancing

Navigating the application process for debt refinancing requires careful preparation, thorough research, and active engagement with potential lenders. Here’s an overview of the process broken down by each important step:

Long-Term Strategies for Debt Management

Effective debt management is crucial for business leaders aiming to leverage financial strategies that foster growth and stability. Let’s explore some practical long-term strategies business owners can use to manage their debt efficiently and use it to support their business goals.

Regular Debt Audits

Conducting regular audits of your company’s debt is essential to understand the current debt structure and identify opportunities for improvement. These audits should assess the following:

• Interest Rates: Review the interest rates on all debts to ensure they are still competitive. Consider renegotiating terms or refinancing debts if lower rates are available.
• Debt Terms: Analyze the terms of your debts to align them better with your cash flow. This might involve adjusting repayment schedules to match revenue patterns more closely.
• Debt Utilization: Evaluate how effectively the borrowed funds are being utilized. Ensuring that the debt is generating a return, whether through growth, savings, or improved efficiencies, is vital for long-term stability.

Debt Consolidation

For businesses with multiple loans or various types of debt, consolidation can be a strategic approach to simplify management and potentially reduce costs. Some benefits of debt consolidation include:

• Simplified Finances: Consolidating multiple debts into a single loan reduces the complexity of managing multiple payments and terms.
• Lower Interest Rates: Consolidating debt often results in a lower overall interest rate, decreasing the total cost of debt over time.
• Improved Cash Flow: With potentially lower monthly payments, debt consolidation can improve a company’s cash flow, allowing more flexibility for operational expenses and investment.

Leveraging Financial Technology

Utilizing advanced financial technology can provide significant advantages in managing debt:

• Automated Payments: Setting up automated payments ensures that payments are always made on time, which is crucial for maintaining a good credit score and avoiding penalties.
• Financial Planning Tools: Tools that help forecast future financial scenarios can be invaluable for planning debt repayments and assessing the impact of potential refinancing.
• Real-Time Reporting: Technologies that offer real-time insights into financial standings allow businesses to make informed decisions quickly and adjust strategies as necessary.

Building Strong Lender Relationships

Maintaining positive relationships with lenders can provide several long-term benefits:

• Better Negotiation Leverage: Strong relationships can lead to more favorable terms during renegotiations or when seeking additional funding.
• Flexibility During Challenges: Lenders are more likely to work with businesses they trust during times of financial difficulty, such as providing temporary relief from payments or adjusting loan terms.
• Access to Better Deals: Lenders often offer exclusive deals or products to trusted clients, which can include enhanced loan terms or first access to new financing products.

Explore Business Financing Options with National Business Capital

Refinancing business debt strategically is essential for enhancing financial flexibility and ensuring long-term stability. When it’s time to act on the strategies we’ve discussed above, remember that the organization you’re working with has a major impact on your financing.

Those searching for the easiest, most convenient avenue to explore their options should consider National Business Capital and its award-winning team. We bring the market to you, so you can apply once, receive multiple options, and work with your personal Business Finance Advisor to navigate from application to funding on your timeline. Having worked closely with the private credit market since 2007, we’re able to reach contracts that don’t exist elsewhere, putting you on the fast track to Grow Your Business to Greatness.

We’re your Debt Advisory Group. Complete our easy application today to get started with the team behind $2+B in financing.