In the world of business finance, managing debt is a crucial aspect of keeping your operations running smoothly. Two common strategies for dealing with multiple debts or high-interest loans are debt consolidation and refinancing. While both can help improve your financial situation, they serve different purposes and work in distinct ways. Let’s explore what each one entails, the key differences, and how to decide which might be the best option for your business.
What is Debt Consolidation?
Debt consolidation is the process of combining multiple debts into a single loan. Instead of juggling multiple payments with different interest rates, terms, and due dates, you take out one larger loan to pay off all your existing debts. This way, you only have one monthly payment to manage, often at a lower interest rate.
What is Debt Refinancing?
Refinancing involves replacing an existing loan with a new one, often with better terms. Unlike debt consolidation, refinancing is typically focused on a single loan rather than multiple debts. When you refinance, you might get a lower interest rate, extend the loan term, or change the loan type (e.g., from variable to fixed rate).
Key differences between debt consolidation and refinancing:
Debt Consolidation | Debt Refinancing | |
|---|---|---|
Purpose | Combine multiple debts into one loan | Replace an existing loan with a new one |
Number of Loans | Multiple debts combined into one | One loan replaced with another |
Interest Rates | Potential for lower interest rates and type (e.g., from fixed to variable) | Potential for lower interest rates |
Ease of Management | Potential for lower interest rates (e.g., from fixed to variable) | Potential for lower interest rates (e.g., from fixed to variable) |
Which Option Is Right for Your Business?
Debt Consolidation
Best for:
- Businesses with multiple loans or debts and high-interest rates.
- Simplifying finances by combining several debts into one manageable payment.
- Lowering the average interest rate across different debts.
Debt Refinancing
Best for:
- Businesses with a single loan looking to get better terms (e.g., lower interest rate, longer or shorter term).
- Reducing the overall cost of a loan without combining multiple debts.
- Taking advantage of better interest rates.
Bottom Line
Both debt consolidation and refinancing are effective tools for managing business debt. An SBA 7(a) loan can be an effective tool for both debt refinancing and consolidation for small businesses. This versatile loan program allows businesses to restructure existing debt by replacing it with a single, more manageable loan, often with lower interest rates and longer repayment terms.
At NEWITY, we help small business owners access capital they need through the SBA 7(a) loan program. You can see how much you qualify for by creating an account and filling out the application. It takes less than 10 minutes and does not impact your credit score.
