The basis of business debt refinancing is the conversion of original debt, including outstanding or overdue amounts, into a new debt instrument. By paying off the current debt obligations with the new debt instrument, businesses can consolidate their debt and obtain better interest rates.Business debt refinancing programs offered by various lenders provide business owners with funding to cover existing debts and start a new debt instrument with new terms. The change in debt instrument can convert short-term loans into longer-term debt, which helps a company improve its cash flow and provides more available working capital. In addition, paying off creditors enhances the reputation of the business, reduces the possibility of litigation, and helps re-establish solid relationships between the business and its key suppliers.
When refinancing a secured loan, lenders will typically refinance up to 80 percent of the value of the collateral. Loan repayment periods will vary depending on the collateral, the size of the loan, and the degree of risk as perceived by the lender. In some cases, the Small Business Administration (SBA) will provide loan guarantees through one of its lending programs.
Before making any debt refinancing plans, make comparisons not only between the interest rates but also between the terms of the various offers. Read all refinancing agreements very carefully. All costs -- including annual interest rate, total finance charge, and any other fees -- should be spelled out in the agreement. Keep in mind that to be worthwhile, debt refinancing must save the business money in the long run. With that in mind, it is important to make sure the interest rate on the new debt instrument will not suddenly jump to a higher rate within a short time. And keep in mind that fees such as service fees, debt reduction fees, and listing fees -- along with the finance charges -- can eat up a portion of the money being saved. Be sure to do the necessary calculations beforehand.