Is Now The Time To Refinance Your Business Debt?

The days of nearly “free” money are coming to an end.

After months of alarming inflation numbers, the Fed has raised interest rates and signaled additional hikes are on the way. Now that the central bank is pumping the brakes in an effort to cool off the economy, businesses won’t find it as easy to borrow money and fuel ongoing growth.

It’s not all bad news. The rise in interest rates—which will likely continue via five to six smaller increases throughout the remainder of 2022—has only started recently, so businesses that act quickly can still take advantage of the current situation. Refinancing existing business debt before rates climb higher could position you for growth and efficient business operations for years to come.

The Pressure Is On As High Inflation Persists

Inflation has been a hot economic topic for months now, but the temperature spiked sharply when the?Bureau of Labor Statistics ?(BLS) released Consumer Price Index (CPI) numbers for April. With the cost of consumer goods up 8.3% year over year, the report painted a picture of the highest inflation rate since 1981 and shattered hopes that the rising tide of inflation would ebb any time soon. As price increases outpace even the?significant gains ?workers have made in pay over the past year, many economists are rightfully concerned that the economy is overheated.

The federal funds rate—the interest rate banks charge each other to borrow reserve funds—is one of the best tools the Fed has for combating inflation, and the Federal Open Market Committee (FOMC) opted to raise it by a half a percentage point in May.

What Kind Of Future Rate Hikes Is The Fed Planning?

As the economy practically bursts from pent-up demand for goods and services and the war in Ukraine adds additional turmoil to energy markets and global supply chains, the Federal Reserve will have to strike a tricky balance between fighting inflation and not extinguishing economic growth. Still, the committee has signaled that similar increases to the one seen in May will likely follow each of its five meetings remaining in 2022, with the next scheduled for June.

Is Now A Good Time To Refinance Business Debt?

As the federal funds rate goes up, the effects will quickly ripple through the rest of the market. That impending shift means the window is closing for businesses to access loans at the low rates we’re still seeing today.

So is now the time to refinance your debts? That answer will depend on your business’s specific needs and the structure of your existing debt.

If you have a sizable amount of variable-rate debt, then it may be time to refinance it into something more stable. For instance, if your business is running several credit card balances and an open line of credit, that debt hasn’t cost you much over the last two years. As rates start to go up, that could change quickly.

A 1% change in the interest rate on a five-year, $250,000 line of credit, for instance, would increase your monthly payment by over $200. If you have several adjustable-rate debts, these changes could have a significant impact on your bottom line.

Even if you’re not at risk of having your rates change, you might consider consolidating and refinancing business debts for any of the following reasons:

• Your existing loan terms aren’t working well for your business.
• You could re-amortize your existing loan terms to reduce your monthly payment.
• In doing so, your business would benefit from freeing up cash.

If any of these are true for your company and your existing loans don’t have any prepayment penalties, then it’s a good idea to refinance soon. Consider this: A 1% increase on a $2 million loan will cost you over $50,000 over 10 years. Rates will only go up from here, and we could easily see a 1% difference before you know it.

Refinancing Options To Consider

If you are considering refinancing your business debts, there are many ways to do it. Traditional lenders and nonbank lenders can work with you to consolidate existing debts and help you achieve your goals.

The SBA 7(a) refinancing program is one option that many business owners should consider. SBA loans are backed by the Small Business Administration and have lower rates than traditional financing options. Its 7(a) loans are designed for funding a variety of business growth opportunities, including refinancing existing debt.

The Bottom Line

If you’re considering refinancing your business debt, now may be the time. The Fed has made it clear that even more rate hikes are coming, and it’s only a matter of time before loans start getting more expensive. Act now and you could lock in a rate that helps your business weather the higher borrowing costs to come.