Refinancing vs Consolidating Business Debt: What’s the Difference?

How much debt does your business have? According to an Experian study, the average small business has nearly $200,000 of debt. Medium- and large-sized businesses, of course, typically owe more money to lenders and creditors. While debt is common when running a business, it can have a significant and negative impact on profitability. If your business is drowning in debt, however, you may want to consider refinancing or consolidating it.

Refinancing vs Consolidating Business Debt: What’s the Difference?

What Is Debt Refinancing?

Debt refinancing is the process of paying off one form of debt with a new and separate form of debt. It typically involves the use of a loan. There are debt refinancing loans that you can use to pay off other loans or credit card debt incurred by your business.

Businesses seek debt refinancing loans to save money on interest fees. If your business has an existing loan or credit card debt with a high interest rate, you might be able to obtain a debt consolidation loan with a lower interest rate. Using this loan to pay off your business’s existing debt will save you money on interest fees.

What Is Debt Consolidation?

Debt consolidation is the process of paying off multiple forms of existing debt with a single form of new debt. It’s called “debt consolidation” because it allows you to consolidate your business’s existing debt. If your business has four outstanding loans, for instance, you can consolidate them into a single loan. With debt consolidation, you can obtain a new loan — known as a debt consolidation loan — which you can use to pay off your business’s four existing loans.

Like with debt refinancing, debt consolidation is typically done to save money on interest fees. You can obtain a low-interest debt consolidation loan. Using it, you can pay off your business’s high-interest debt. With that said, it’s also done for convenience purposes. You’ll have an easier time paying off a single debt refinancing loan as opposed to multiple existing loans or debt.

Differences Between Debt Refinancing and Consolidation

While they are both used to deal with large amounts of debt, debt refinancing and consolidation aren’t the same. Debt refinancing is used to pay off a single form of debt, whereas debt consolidation is used to pay off forms of debt. If your business only has a single outstanding loan, you may want to seek a debt refinancing loan. For multiple forms of debt, conversely, a debt consolidation loan may be a better option.

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