In times of economic uncertainty, small businesses often face challenges in maintaining a steady cash flow and accessing capital. However, there are several strategies that can help businesses increase their capital and weather the storm. One such strategy that often comes to mind is refinancing, but is that always the best approach?

Refinancing refers to the process of taking out a new loan to pay off an existing loan, typically with better terms and conditions. This can include lowering interest rates, extending the repayment period, or changing the loan structure. Refinancing can potentially provide small businesses with immediate access to additional funds, helping them improve their cash flow and address financial challenges.

When Refinancing is Beneficial:

Refinancing can be a smart move for small businesses under certain circumstances:

  1. Lower Interest Rates: If market conditions have changed, and interest rates are significantly lower than when the original loan was obtained, refinancing can help businesses save money on interest payments and reduce monthly expenses.
  2. Improved Cash Flow: Refinancing can help small businesses restructure their debt by extending the repayment period. This allows for lower monthly payments, freeing up cash flow for other essential expenses or investment in growth opportunities.
  3. Consolidating Debt: If a small business has multiple loans or debts with different interest rates, refinancing can consolidate these into one loan with a single payment, simplifying financial management and potentially lowering overall interest costs.
  4. Accessing Equity: If a small business has built up equity in its assets, such as real estate or equipment, refinancing can be an opportunity to leverage these assets to can unlock this equity and provide additional working capital for expansion or other business needs.

When Refinancing may not be the Best Option:

While refinancing can be advantageous for many small businesses, it may not always be the most suitable solution. Consider the following scenarios:

  1. Cost of Refinancing: Refinancing typically involves fees, closing costs, and other expenses. If these costs outweigh the potential benefits, it may not be financially beneficial for the business.
  2. Early Repayment Penalties: Some loans come with penalties for early repayment. Before refinancing, it’s essential to assess whether these penalties would offset the potential savings or benefits.
  3. Unstable Creditworthiness: If a small business’s creditworthiness has significantly declined since obtaining the original loan, it may be challenging to secure favorable refinancing terms. In such cases, alternative funding options may be more suitable. Focusing on reestablishing the business’s creditworthiness by speaking to a financial consultant or loan expert 
  4. Lack of Equity: If assets are highly leveraged, equity may not be available to provide a suitable refinance. In this case, it is important to evaluate the return of the asset to the business and create an appropriate strategy plan to maximize the asset within the current market conditions.  This may be an alternative to refinancing to increase cash flow. (Overall, my thought is —–a business can either sell the assets and find alternatives (in the event of a CRE, businesses can lease, rent, or add a tenant to the CRE.  In the event of equipment, it can be sold, increase production, or creative alternative uses)

Refinancing can be a valuable tool for small businesses to increase capital during times of economic uncertainty without seeking investors or change of ownership. However, it is crucial to evaluate the specific circumstances and weigh the potential benefits against the associated costs and risks. Small businesses should consider consulting with financial advisors or loan experts to determine whether refinancing is the right choice for their unique situation. 

Contact one of Poppy Bank’s loan officers today to learn more about your options and what might be the best possible strategy for your long-term business goals.