Debt consolidation and refinancing

First published 29 January 2019 • Updated 07 June 2019

If your business is starting to get weighed down by lots of different debts, it may be time to consolidate those debts and refinance.

Running a business often means running a debt. Borrowing is a standard way to raise finance for business growth, so being in debt is not itself a cause for concern. However, if you have debts from a variety of different sources that have built up over time, with lots of different interest rates and payment dates, this can become an expensive burden that’s hard to keep under control.

What is debt consolidation?

One solution to having lots of different debts is to combine them into one loan with a single monthly repayment. This is called refinancing or debt consolidation.

Depending on your circumstanes, refinancing can offer a variety of different benefits. For example:

• Lower interest rates
  A small business debt consolidation loan will usually offer a lower APR than short-term financing options.
• It’s simple
  Debt consolidation is naturally simpler than trying to manage multiple debts as you’ll have a single monthly payment and one account to manage.
• Longer to repay
  As these are longer-term loans (up to 10 years), the monthly repayment is lower. This can give your business time and space to develop.
• Simpler cash flow
  You don’t have to make a lot of different payments at different times of the month, so it’s easier to manage your cash flow.
• Borrow more
  When you qualify for consolidation refinancing, you may be able to borrow additional funding, if you need it.
• Avoid insolvency
  Debt consolidation can be a good way of avoiding insolvency, by giving you more control over your debt.

Should you consolidate your business debt?

If you have a number of business loans that are hard to keep track of, or for which you sometimes struggle to make the repayments, now may be the time to consider refinancing.

Here are some other reasons why it might benefit you to consolidate your debt.

Your credit rating has improved

If your personal credit score has significantly improved since last time you borrowed money, it could be a good time to apply for debt consolidation. This will give you a better chance of qualifying for lower interest rates and longer repayment terms.

Your business finances have improved

The best time to approach a lender for a consolidation loan is when your business finances are positive or improving. You’ll be a more attractive prospect for lending and will more easily qualify for the best rates and terms. Anything that shows growth or recent success can help, such as the results of a busy season, increased revenue or lower running costs.

Your personal finances have improved

As a small business professional, your personal finances are also important. This is because you’ll probably be asked to guarantee your loan. As with business finances, anything that clearly shows you’re in good financial health, have an increasing income or have recently reduced outstanding debt will help.

Your business has been going for a while

A key factor that makes your business a more attractive prospect for lenders is longevity. The longer you’ve been trading successfully, the greater the opportunities for gaining a good debt consolidation deal.

Reasons not to refinance

If none of the above criteria apply, then now may not be the right time to consolidate your debts. In particular, if your financial situation has deteriorated since you took out credit, you may wish to delay applying for refinancing as you might not be offered favourable terms. Wait until you are a more attractive prospect for a lender before approaching them.

In the meantime, you could consider paying down some of your more problematic debts if it’s practical to do so. This may improve both your financial situation and your creditworthiness, and so make it easier to refinance later.

Your refinancing options

There are two main kinds of debt consolidation loans: secured and unsecured.

Secured loans

A secured loan is the most common type. For this you will need to offer collateral. The loan is secured against a property, vehicle or other major asset that belongs to you, so that if are unable to meet the monthly repayments set out in your agreement, the lender can reclaim their debt from the asset instead. This usually means the asset will need to be sold to pay off the debt.

Unsecured loans

An unsecured loan doesn’t require collateral from you, so you’re not putting any other assets at risk. However, this makes them hard to obtain, and you might not get such good repayment terms. Usually you will need a very good credit history in order to be offered an unsecured loan.

What is a Corporate Voluntary Arrangement?

A Corporate Voluntary Arrangement (CVA) is another way to resolve debt problems and continue trading. It allows you to make a new arrangement with your business creditors so that you can pay off your debts sustainably and affordably.

A CVA must be implemented by an insolvency practitioner, who drafts a proposal for your creditors. During the period of the CVA you make a single monthly payment to the insolvency practitioner.

A CVA may deliver the following benefits:

• Your cash flow improves
• You can cut costs
• The board and shareholders usually retain control of the company
• It costs much less than administration and is not publicly announced
• Your creditors get to keep their customer and have greater certainty of being paid the money they are owed

Refinancing your business can revitalise it, bring you more security and aid smoother growth. Ask your accountant about the best options.