Finance 101 - 12.28.2016

Refinance 101: How to Save Your Business from Unaffordable Debt

Suppose you're like a lot of other small business owners: you ran into a short-term cash crunch. Maybe a key piece of equipment failed. Or an unexpected expense came up. Or you needed fast cash to make payroll.

So, not having any other great options, you went to a short-term lender or merchant cash advance company and took out a short-term, high-interest, daily payment loan.

The problem is now you're saddled with a short-term, high-interest, daily payment loan that you're struggling to repay. Money is being debited daily, your monthly debt payments are greater than your monthly income, and you're putting off paying key vendors, suppliers, and partners. You're stressed out.

The big question you have is: "How do I save my business?"

Hopefully, we can help.

Understanding the Problem

Before getting into the solution, it's important to understand the problem. The problem with these types of short-term, high-interest, daily payment loans isn't necessarily what you think.

Yes, these daily payment loans have high interest rates. In fact, the APRs are so high on these daily payment loans that most providers go out of their way to obfuscate them so you don't know your true rate. So we made a true rate calculator to help you find out the true cost of your loan. 10 out of 10 business owners are shocked (and also embarrassed) to discover their true APR. But the sky-high APR isn't the main problem.

And yes, the daily ACH debits are annoying. Your revenue doesn't always come in daily... if you're like most business owners, it comes in weekly or even monthly. A daily debit creates an unnecessary cash crunch in between payment periods. These are especially annoying to business owners who try to turn them off... Often it's nearly impossible. They also have the affect of driving up your APR.

But the real problem with these short-term, high-interest, daily payment loans is the term. A six- or nine-month term is great for the lender because they get their money back quickly, so it's less risky. But it's killer to your business. These shorter terms are by their very nature unaffordable because they mean a higher payment. Your term is the biggest driver of affordability, and the shorter the term, the less affordable they are.

Understanding the Solution

If the real problem is the short term, then the best solution is to lengthen it.

Yes, by doing so, you'll probably increase your total interest paid. That's because most short-term loans and merchant cash advances have stiff prepayment penalties, meaning you don't get any sort of discount for paying them off early.

But crucially, your monthly payment will be significantly less. As a basic rule, if you double the term, you cut the monthly payment in half. Lengthening the term in this way can take an unaffordable high-interest rate loan and turn it into an affordable, lower-interest rate loan. Doing this will give you the breathing room you need to recover and make your loan payments.

So how do you do this?

Simple: refinance your loan!

Refinancing your business loan is easier said than done, especially if you have a larger loan amount. A lot of medium- and long-term lenders shy away from refinancing debt. Even the SBA discourages refinancing existing debt in many cases.

There are two big reasons for that. First, refinancing existing debt is seen as a loan use with a lower return. It's not bringing any new money into the business, it won't yield any return on the investment. It's just freeing up cash flows.

Second, they're afraid of "stacking." Stacking is taking out additional debt after getting a loan, and "stacking" it on top of the existing debt. Stacking is a significant cause of default, because a business takes on more than it can afford to repay. These lenders are worried that if you've taken on high-interest, short-term debt before, you're more likely to do it again.

Tips

So how can you help your case?

First, you can go to a lender like Able that specializes in refinancing short-term, high-interest debt. You can even compare your monthly payments side-by-side using our refinancing calculator.

Second, you can make it clear to your lender that you understand the problems of short-term, high-interest debt. If nothing else, try to avoid seeming cavalier about your unaffordable debt.

Bottom line: if your business is collapsing under the weight of unaffordable short-term debt, seek out a lender who can help refinance that debt at a lower rate and over a longer term. The cash flow savings can be significant. At Able, for instance, we can usually cut the monthly payment by about 50%. Worth considering!

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