Running a small business isn’t always plain sailing and there are likely to be ups and downs, including times when business is doing great and the cash is rolling in, and times when you’re feeling the pinch.
The important thing to remember is that you do have options and there are various possible avenues to explore when cash flow is squeezed. There’s a huge market out there now for businesses looking for finance, with funding options of all shapes and sizes to consider. It could be that some simple debt consolidation is all you need to provide that extra bit of breathing room.
What is ‘debt consolidation’?
Put simply, debt consolidation means taking out a new loan to pay off several other existing debts you might have, or just changing one for another. It is also commonly referred to as ‘refinancing’.
Whether you’re servicing one debt, or several, it can pay to shop around for a different product, a better rate, or a longer term, to free up some working capital on a month-to-month basis.
Why would I consolidate debts?
There are a number of reasons why you might want to consider refinancing, which can result in savings, simplicity and added security for your business.
Consolidating debts in order to get a better deal and reduce monthly repayments is probably the main reason a business might look to refinance – especially if times are tight. Reviewing your business’s debt can often be a valuable exercise in any case, as it could be that there are now better interest rates available than when you first took out your loan. This will either mean you can lower your monthly payment, or pay back what you owe sooner.
It could be that the best way to reduce the monthly bills, and protect your company’s viability, is to refinance over a longer term, thereby reducing the monthly payments. While this will mean committing yourself for an extended period of time, the move might be necessary to see you through a temporary blip or short-term cash flow problems.
Accumulating several different debts from a variety of lenders is easily done over time. You might decide to consolidate them simply to make servicing the debt easier. Refinancing results in one loan with one lender – and a lot less paperwork and hassle for you.
Sometimes refinancing isn’t just about reducing your monthly outgoings and improving working capital; if you’ve been struggling to meet repayments, it could be more serious. Debt consolidation could be the answer to avoiding the threat of CCJs or insolvency.
Asset refinance is a particular form of debt consolidation suited to those who have assets in the business. It enables you to unlock the cash in those assets, basically by using them as security against a loan.
You can borrow money against the value of an asset in your business, on the basis that the lender will take ownership of the asset if you default on your repayments.
All manner of assets can be used in a refinancing deal, as long as they depreciate well, including vehicles, equipment, machinery and commercial property.
Typically, lenders will offer anything up to 75 per cent of the value of the asset – or 75 per cent of the proportion of the asset you own. The second part of that statement refers to the fact that you can even refinance assets that you are still paying for. The amount you can borrow will be based on the percentage of the asset that you have already paid for – so the equity you have in that item.
If you’ve paid £9,000 towards a £10,000 machine, for example, you might be able to refinance it up to 75 per cent of that £9,000, in which case the new lender will pay the outstanding £1,000, take charge over the asset, and lend you the cash.
Debt consolidation can be a wise move if your business is feeling the pinch, or looking to create some vital extra working capital that you might need for growth. Reviewing your debts regularly can be good practice anyway, as it could be that you’re paying over the odds for outdated finance arrangements.
Even if it doesn’t save you money, refinancing might be worth it for simplicity, so you can avoid dealing with multiple lenders and multiple interest rates, and instead have one simple arrangement.
It can also be useful if your circumstances have changed and you want to bring your costs down for a year or so – refinancing over a longer term could be just enough to give you that extra breathing room.
If you’re considering a refinance but don’t know where to start, Funding Options can help you find the right lender for your situation.
Conrad Ford is founder and CEO of Funding Options, the online marketplace for businesses finance. Funding Options is helping the small walk tall. Funding Options helps businesses find the right funding for their situation — whether they want to grow, they’re fighting for survival, or simply need to pay a tax bill. @FundingOptions