Managing debt as a small business owner means more than just paying it on time. It also means being ready to move the debt to a more cost-efficient product as the opportunity presents itself. Since there are usually loan origination costs, determining when this should happen is a skill unto itself. It’s also important to know why you are moving debt and what you get from it. Consolidation and debt refinancing are often used interchangeably, but they are very different operations that serve different purposes for your business.
Why are they used as if they mean the same thing so often? It’s easy to understand when you realize that most people do consolidate and refinance at the same time. Consolidation is the act of bringing two or more loans into the same product, leaving you with a single new loan instead of a couple of them. This is generally done to streamline outgoing money and sometimes to lower payments, as the loan terms reset when you take out a new one, so you can possibly pay less per month at the cost of having a longer repayment term than either loan originally enjoyed. Refinancing, on the other hand, is the act of taking out a new, lower interest loan to pay off an old higher interest one.
It’s easy to see why both are done together so often, but it’s also important to separate them. There are plenty of opportunities to refinance and save that don’t involve any consolidation, and thinking of the two terms as interchangeable can lead a business owner to ignore debt refinancing when it’s a good idea. One perfect example of a refinancing opportunity that doesn’t involve loan consolidation is rolling a bridge loan into a long-term mortgage, allowing you to get longer payment terms and a lower interest rate after rehabbing the property.
It’s less common to consolidate without also getting the interest benefits of a refinancing than it is to refinance without consolidating, but it is still a valuable tool under the right circumstances. For example, if you have several credit lines creating multiple points of payment every month, you can clean up your cash flow a lot by consolidating to a single line with a single payment date. One of the first principles of managing business finances is that your cash payments going out can be more cost-effective if they are timed right than if their overall size is minimized, so using a consolidation correctly can have powerful results for your day to day financial management. Of course, if you can get those benefits while also reaping those of a debt refinancing, that’s all the better.