Pros and Cons of Debt Refinancing

So you had taken a business loan out when the business was in its early stages.  Perhaps the rate was a little higher or the loan amount a little lower than you had requested, or maybe the lender required an additional guarantor or additional collateral.  You may even use factoring of your receivables when things get tight.

Flash forward to a few years later. The business has stabilized or is in a growth mode, and you have ideas for the business’ future that could benefit from additional capital.  Best case scenario, the business real estate has increased in value, either due to market or to improvements made out-of-pocket, and you want to “tap” that equity.  Maybe you want the comfort of “working capital”.  You may want to increase your staff.  Job creation is a beautiful thing!

Most lenders want to see a two-year history of payments to consider a refinance.  This can be mitigated by the credit history of the business. Usually a Dun & Bradstreet or similar business credit report is obtained, as well as your personal credit history.  Always make sure your payments are as agreed.

Pros:

  • Cash out $ for operating or other expenses, including business expansion.
  • Lower current rate and amortization change could improve cash flow. Improved cash flow can open opportunities for desired business objectives.
  • A fixed rate may be an option as your current rate adjustments are troubling to you.
  • Consolidate debt for better rate and terms and only one payment instead of several.
  • Interest should be deductible assuming funds are used for business purposes.

Cons:

  • Closing costs $ are part of the process.
  • New appraisal $ most likely required when realty involved; valuation could be an issue.
  • Re-qualifying including documentation, credit report pull could impact score in the short-term.
  • Re-amortization may restart the payment over a longer term than is currently due.
  • Unsecured debt refinanced (credit cards) now in a secured position.
  • There could be an existing pre-payment penalty (if refinanced with another lender) and a new prepayment period could start on the new loan. This could be an issue if you think ownership might change soon.
  • Business partners may not agree in the need or use of the funds.

Ultimately, it is up to the business owner(s) to determine what is best for the company.  Careful analyses should be performed.  Reach out to your internal departments, such as finance or sales, if applicable.  Talk with your outside accountants, perform a payback analysis.  Find a mentor, a Certified Development Company such as Coastal Community Capital, SCORE or a similar local group that may be able to put things in perspective.  Usually, this is free of charge. And don’t forget your banker or other lending source!


About the blogger: Bill Flynn is VP Commercial Lending of Coastal Community Capital. Email him at
billflynn@coastalcommunitycapital.org.