Consolidating and refinancing business debt

Knowing how to manage debt is vital. Consolidation and refinancing are two ways to restructure what your business owes.

Learning how to manage debt is a crucial part of running a business.

Yet, all too commonly, adverse trading conditions make your existing debt a burden that sucks cash out of the business.

If you want to reduce your debt by making the cost of servicing it more manageable, you can consider consolidating a number of separate loans and/or refinancing a single loan.

Consolidating and refinancing are two separate approaches to restructuring your business debt.

Debt consolidation works by combining all your existing loans from several different lenders into a single, larger debt or loan from one provider.

In effect, that provider will pay off the previous debts, leaving you with only a single loan to repay. This new loan could come either from a brand-new lender or one of your previous lenders.

There are numerous potential benefits of debt consolidation, including the following:

  • It can save you the administrative burden and stress of having to deal with several different lenders by gathering your loans into one, more manageable and predictable payment.
  • It can help lower the monthly cost of servicing these debts, especially if you can obtain a single loan at a lower interest rate.
  • Even if you can’t obtain a lower rate of interest, a new loan with a longer repayment schedule might reduce the monthly payment, helping your cash flow in the short term. Though, by extending the number of months you’ll be paying interest, you will pay back more overall.

Before you act, review:

  • any prepayment penalties you might have to pay your current lenders
  • any fees you might have to pay a new lender

Also compare the annual percentage rate of all your loans to decide how to proceed. If you can replace several high interest rate loans with a lower rate on a consolidated loan, it could make sense.

Refinancing involves taking out a new loan to pay off an existing loan. Restructuring your loan in this way can get you:

  • a lower monthly payment
  • a longer (or shorter) repayment term
  • a more convenient payment structure

Unlike debt consolidation, refinancing doesn’t require you to have a number of outstanding debts, as you only need one existing loan in order to benefit.

Refinancing can provide greater flexibility in dealing with your debts. For example:

  • A refinanced loan with a longer term than your original loan can reduce your monthly payment. This will leave with you with more cash to invest in your business.
  • A refinanced loan with a longer term and a larger principal can keep monthly payments the same while you borrow more.
  • If you manage to obtain a lower interest rate and the same repayment term, you can save money each month and also reduce the overall amount you repay, since you’ll accrue less interest.

Of course, you’ll need to check the fees the new lender charges, as well as any prepayment penalties from your original lender. You could also check the prepayment fees from the new lender, just in case you later decide to refinance again.

When consolidating or refinancing business debt, you’ll come across two main types of loans: secured and unsecured.

Secured loans

A secured loan is the most common. For this, you’ll need to offer collateral (security), such as a property, vehicle or other major asset that belongs to you.

If you’re unable to meet the monthly repayments set out in your agreement, the lender can reclaim their debt from the asset you’ve put forward as security. This usually means selling off the asset to pay off the debt.

Unsecured loans

With an unsecured loan, you don’t need to provide collateral, so you’re not putting any of your other assets at risk.

However, this makes the loans harder to obtain, and you might not get such good repayment terms. To be offered an unsecured loan, you’ll usually need a very good credit history.

Consolidating or refinancing debt may not necessarily give you enough cash to keep your business going.

For instance, if you’re making less and less money each month, the modest savings you make from reorganising your existing debt may not be sufficient to allow you to trade your way out of your financial difficulties.

Other measures to relieve debt include the following:

  • Selling your business, liquidating assets and making efforts to collect debts from customers more quickly.
  • Bankruptcy – ultimately, if you’re unable to sell the business, your best option might be to declare yourself bankrupt.

If your business is struggling, there are various ways to try and deal with debt.

Business Debtline Link opens in a new window

A charity that gives businesses free and independent advice on dealing with debt.

National Debtline Link opens in a new window

A charity that provides free and independent advice on dealing with debt. Business Debtline is part of National Debtline.

Step Change Link opens in a new window

The UK's leading debt charity, offering expert debt advice and fee-free debt management to help tackle debts.

Advice NI – Business Debt Service Link opens in a new window

Free tailored, independent and impartial advice on debt for sole traders, partnerships and limited companies in Northern Ireland.

FSB Debt Recovery Link opens in a new window

A debt recovery service for members of the Federation of Small Businesses (FSB). Find out what the service offers and what membership entails.

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Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.