The Bionic guide to refinancing and consolidating business debt

Many businesses will experience trouble with debt and cash flow at some stage. But debt doesn’t necessarily need to be a burden. In fact, learning how to manage your debt is a crucial part of learning how to run a business.

However, staying in debt for too long can have serious consequences. It can result in you having a bad credit rating (making it harder to borrow money) or, in a worst-case scenario, lead to insolvency.

Refinancing or consolidating your debt is a good way to keep it manageable, but it can be complicated. This guide will help you understand what debt consolidation is and how it works.

What is debt consolidation for business? 

Business debt consolidation is a way for companies to ease the pressure of debt and loan repayments. It does this by bringing together - or consolidating - all existing debt into a single loan.

Debt consolidation is sometimes known as refinancing, but there is a difference between the two in that refinancing is just rearranging existing terms with more favourable repayment terms - so this can be done even if you only have one loan to refinance.

How does debt consolidation work?

Debt consolidation works by bundling together all your existing debts from multiple lenders into a single larger debt or loan from one provider. In effect, that provider will pay off the previous debts, leaving you with a single loan to repay. This new loan could come either from a brand new lender or one of your previous lenders. 

Can I use a small business loan to pay off debt?

You can use a small business loan to pay off your existing debt. However, most loan providers will want to know what you are using the funds for before agreeing to your loan, and some might not want the money to be used to repay existing debt.

It might be useful for a UK small business looking for a debt refinancing solution during the current coronavirus pandemic to consider one of two government-backed loan schemes. The Bounce Back Loan Scheme (BBLS) offers loans of up to £50,000 specifically for small businesses, while the Coronavirus Business Interruption Loan Scheme (CBILS) is for borrowing between £50,000 and £250,000. With both loans, there is nothing to pay for the first year, giving your business time to get back on its feet. However, you cannot have a loan from both schemes at the same time, so think about how much you need to borrow before applying.

Why do companies refinance their debt?

There are a number of reasons why a business might refinance debt, such as to save money and keep debt levels in check. It usually comes down to improving your company's financial position and improving its credit score in the long term.

When you consolidate your debt, you might be able to get a lower interest rate than what you're paying on existing business loans or credit cards. Having all your debt consolidated into one loan with one lender can also help to keep your debt levels in check as you can see exactly how much you owe and have an idea of when it should be paid off. This can also help with budgeting. 

If your business is struggling financially, debt restructuring can help you keep up with repayments and avoid any debt collection measures being taken out by your creditors.

What are the advantages of refinancing or consolidating business debt?

The main advantage to a small business refinancing or consolidating business debt is the significant flexibility that it gives to your finances. 

If you are paying off several debts and replacing them with a single loan, you may well be able to negotiate a better interest rate, thereby bringing down your monthly repayment costs. This in turn will help your business cash flow. By the same token, you might arrange a longer repayment term or a larger amount to borrow - again, both of these options could give you more financial freedom.

It is also undoubtedly easier for you as a business to manage a single loan instead of several different ones from different lenders. 

What are the disadvantages of refinancing or consolidating business debt?

Because most business consolidation loans are made over the long term, you could be paying interest for longer than you were on the original debt you are paying off. This means that, even if you have arranged a lower interest rate (therefore lowering your monthly repayments), you could end up paying more overall. 

It is also worth noting that debt consolidation is not the same as getting rid of your business debt altogether. If the reason you have lots of loan repayments is that your business fails to generate significant income or has high overheads, then refinancing or consolidating those loans may not be the best way to get your business out of debt.

Does refinancing hurt your business credit score?

There are a couple of ways that refinancing can hit your credit score:

• Credit checks are carried out on all refinancing arrangements, and your score dips whenever a hard credit search is carried out.
• If you're closing a long-standing account to move the debt to another lender, this can lower your credit score. The impact of this will be lessened if you kept up with repayments on the previous loan. 
• Taking on new debt can also cause your score to dip, and refinancing is essentially another loan and so it will do the same.

Although a good credit score is useful - sometimes vital - for many businesses, don't let a dip in your score put you off refinancing existing debt if this is the best solution for your business. If you're struggling with existing debt, then missing repayments on various loans and credit cards will have a bigger impact and more serious implications.    

If you're unsure, it's worth getting professional financial advice. 

What is business debt refinancing?

Business debt refinancing is a way to change the terms of your existing debt by arranging a brand new loan. You can do this by taking out a small business refinance loan; these loans are available from most lenders. They are a type of small business loan designed specifically to pay off existing debt from other lenders.

Unlike debt consolidation loans, a refinancing loan can be used to change the terms of just a single existing debt.

Is business debt refinancing right for your business?

When considering how to get your business out of debt, there are a number of things to keep in mind. First, make sure you get a full picture of your business’s financial health. Only once you have established whether your debt problems are short term or a symptom of more significant issues should you think about getting a loan to consolidate that debt.

It might be the case that it is better to restructure your business and try to pay off your existing debts, rather than take on a new loan that could prove more expensive in the long run.

Where to get business debt advice in the UK

For a small business, debt management is one of the most important things to keep on top of. If you are in a significant amount of debt, the best thing to do in the first instance is seek out expert advice.

Luckily, businesses in the UK can turn to a number of independent bodies that offer bespoke advice to anyone struggling with debt. These include Business Debt Line and National Debt Line. Step Change also offers advice for the self-employed and sole traders.

How Bionic can help you find the right business finance

Bionic can help find you the right lender and the right product if your business needs a cash advance, debt consolidation or if you’re looking to refinance your business debts. Our team of experts knows the market back to front and will scour offers to get you the best refinance business loan rates available.

Give us a call today and tell us about your business’s debt refinancing needs and we will help you find a solution that suits you.