Rates are Coming Down: Is it Time to Refinance and Consolidate Debt?
A Day in the Life of a Restaurant Owner
Meet Vanessa. She owns a restaurant with a strong core business. The margins are modest, but she’s profitable and growing. Wanting to enhance the bar and add decorative lighting, she took a quick cash advance from her POS provider to move fast.
The funds arrived quickly, but the daily payments drained cash flow more than she expected. She couldn’t pay back the advance as soon as planned and suddenly had less operational flexibility overall.
If Vanessa’s experience sounds familiar, you’re not alone. Maybe you took a short-term line of credit instead of a cash advance. Regardless of loan type, many restaurant owners face unexpected cash flow strain due to debt burdens.
The good news? Refinancing and debt consolidation can provide financial relief and offer new opportunities. And with interest rates finally trending lower in late 2024, now is the best time in years to refinance business debt.
Understanding Refinancing and Debt Consolidation
Refinancing means replacing one or more existing loans with a new one, ideally with a lower interest rate, better repayment terms, or both. It can ease financial strain by lowering monthly payments, reducing overall financing costs, or improving cash flow. Sometimes, refinancing also provides “cash out”, meaning additional operating funds for your business.
Debt consolidation involves combining multiple debts into a single loan. The goal is often the same—lower interest rates, better terms, or simplified payments.
(For simplicity, I’ll use “refinance” to refer to both refinancing and debt consolidation, as both involve restructuring existing debt.)
These tools offer much-needed relief for restaurant owners with high-interest or short-term debt. They become even more attractive when interest rates are declining, as they have been recently.
Below is a graph showing the Fed Funds Rate in 2024, illustrating the recent rate cuts. While this rate doesn’t directly indicate specific business loan rates, many small business loans—including SBA loans and lines of credit—adjust when the Fed Funds Rate drops.
What Types of Debts Can I Refinance?
There are thousands of lenders offering dozens of forms of small business financing, so there’s no single answer. However, some common practices do apply.
Debts That Are Usually Eligible for Refinancing:
✅ Business Cash Advances – Often the most expensive type of financing, these are prime candidates for refinancing.
✅ Business Credit Cards – High-interest balances can often be refinanced into lower-cost loans.
✅ Business Loans & Lines of Credit – Traditional business debt can frequently be refinanced for better terms.
Debts That Are Harder to Refinance:
❌ SBA Loans – Possible but less common, as SBA loans have some of the best terms already. And SBA lenders are typically hesitant, or sometimes unable, to consider refinancing an existing SBA loan.
❌ Personal Debt Used for the Business – Personal credit cards, personal loans, and HELOCs are typically ineligible for refinancing.
Pro Tip: Keep all financing in your business name whenever possible. Even if a personal guarantee is required, having the debt in the business’s name can help build business credit, increase refinancing options, and ensure financing costs can be deducted as business expenses.
Eligibility Based on Loan Use
Another factor in refinancing eligibility is how the original financing was used. Some lenders require proof that funds were spent on business expenses.
This requirement is more common among SBA lenders than non-SBA lenders. However, not all SBA lenders enforce this rule, so it’s important to understand which lenders scrutinize past spending and which do not.
This issue frequently arises with credit cards, where purchases tend to be numerous and varied. Proving that every transaction was for business use can be difficult, making some lenders hesitant to refinance credit card debt. If you plan to refinance credit card balances, seek lenders that do not require a detailed breakdown of past transactions.
Similarly, transferring loan funds to a personal account—even for legitimate business expenses—can raise red flags for lenders. While this may be acceptable from an accounting standpoint, some lenders may hesitate to refinance such loans due to concerns about personal versus business use of funds.
When Does it Make Sense to Refinance?
Refinancing can help restaurant owners optimize cash flow, manage financing costs, and access additional capital. The most common reasons to refinance include:
Lowering Monthly Payments
The most common reason restaurant owners pursue refinancing is to lower monthly payments. Reducing monthly payments can free up cash for bills, payroll, reinvestment or equipment. Lower monthly payments can come in two ways:
- Lower Interest Rate: A lower rate reduces monthly payments and overall debt costs.
- Longer Loan Term: Extending repayment terms can lower monthly payments, even if the interest rate is higher. Let’s look at an example of when a higher rate might be acceptable.
Example: A $100,000 loan at 9% over 3 years has a monthly payment of $3,180. Refinancing to a 5-year loan at 13% would lower the payment to $2,275—reducing cash flow burden by nearly $1,000 per month. Yes, the interest rate is higher, but some owners would embrace the cash flow improvement even at the higher loan cost.
Obtaining Working Capital
Many owners refinance not just to improve terms but to access cash. A new loan can pay off old debt while providing additional funds for renovations, marketing, or expansion.
For example, a restaurant with a $100,000 loan and needing $75,000 for upgrades could refinance into a $175,000 loan, consolidating debt while also securing additional capital.
Refinancing to obtain working capital is sometimes necessary to obtain an approval. Reasons for this can include:
- Loan size minimums – most lenders have loan size minimums, and refinancing may meet this minimum where a working capital loan by itself does not.
- Lender lien position – many lenders will not want to have another lender “in front of them” in the order of UCC filings. A UCC filing is a declaration that a creditor has an interest in your business assets, and those assets are serving as collateral for a debt. (For more on UCC filings, see What is a UCC filing and how does it affect my business?)
- Keeping payment low – Sometimes you can obtain cash out from a refinance loan and still keep the monthly payment very close to the existing payment. (In fact, this is sometimes necessary to keep the payment low enough to qualify for a new loan.) How is it possible that the payment stays the same, even though you are getting cash out?
Example: A business borrows $100,000, with a 10-year term, and an interest rate of 10%. The payment on that loan will be $1,322. Now suppose four years elapse. The loan principal (amount still owed) has been paid down through monthly payments, plus the owner once paid the loan down $20,000 after an unexpectedly great couple of months. The current balance on the loan is $51,333.
This business could get a new loan for $100,000 (again a 10-year loan, 10% interest rate), and the new loan would payoff the existing balance AND provide $48,667 in working capital. And the new payment would be the same $1,321.51.
Yes, the business is restarting the 10-year clock on those payments, and the total cost of financing is now higher. However, many owners prefer to get new working capital this way so that they don’t put much or any additional burden on monthly cash flow.
Reducing Payment Frequency
Most cash advances obtained by restaurants, including those offered by POS vendors, require daily payments. For many owners, making payments daily can be more challenging than expected.
By refinancing these advances into other types of financing, owners can move from daily to weekly or monthly payments. Similarly, refinancing can help some owners shift from weekly to monthly payments.
PRO TIP: Not only are cash advances the most expensive business financing you’ll find, but they usually cannot be paid back early for a discount. This is different from most traditional loans. With most cash advances, you will owe the same amount whether you pay it off as expected or pay it off very early. Be sure to read the fine print or talk to your lender about this before taking one of these advances.
Lowering Overall Financing Costs
As we’ve seen, many of the above reasons for refinancing ultimately provide a lowering of overall financing costs. Most often, a lowering of overall financing costs comes from lowering the interest rate or the payback amount, or shortening the loan term.
Sometimes a lowering of overall financing costs comes with higher payments. This can happen when shortening the loan term. If faced with this situation, you simply need to weigh the impact to the business of increasing monthly payments versus having a lower total loan cost over time. There is no one right answer to which is preferable.
Challenges to Refinancing Your Business Debt
Refinancing can be a powerful tool, but it’s important to know what obstacles might come up in the process. The more prepared you are, the better your chances of securing the right loan for your business.
The challenges you might face when pursuing a refinance or debt consolidation loan are often the same challenges involved with pursuing any type of business financing. Lenders will review the same application criteria, including your personal credit, personal background, business credit and business financials.
PRO TIP: Sometimes it is possible to refinance with the same lender that made the existing loan, and in those cases the process might be a little bit more streamlined and application less rigorous. However, don’t assume that your existing lender will give you the best financing option. Due your homework in comparing options from multiple lenders when possible.
The types of refinance loans you might qualify for will depend on all of those application criteria, and lenders and financing types vary widely with refinance loans. As with any form of business financing, most restaurant owners will be best served working with a finance broker to help navigate these waters.
Practical Steps for Refinancing and Consolidating Your Debt
If you’re ready to explore refinancing, start by evaluating your current debts. Make a comprehensive list of your loans, noting the recurring payments, terms, interest rates, and repayment schedules.
Next, set clear goals for refinancing: are you seeking to lower your payments, simplify terms, or improve cash flow? Or are you primarily looking for operating cash but also wondering if you can improve on some existing loan terms?
Finally, consult a professional. Brokers and financial advisors can offer valuable insights and help identify the best options for your unique situation. There are thousands of lenders and dozens of loan types, and navigating this complex landscape can be daunting for a busy restaurant owner. Experienced brokers have the expertise and networks to identify favorable terms, compare products, and avoid common pitfalls such as hidden fees.
If you’re interested in working with an advisor to help you learn more and identify refinancing and debt consolidation opportunities, feel free to submit an inquiry here or email me directly at mike@everfundcommercial.com.
Conclusion
Refinancing and consolidating debt may seem complex, but they can offer restaurant owners financial relief and flexibility. With rates starting to decline in late 2024 and expected to continue falling in 2025, now is a smart time to explore refinancing or debt consolidation options.
By taking proactive steps and seeking expert guidance, you may be able to improve your cash flow, bring in needed new funds, reduce financial stress and ultimately focus on delivering great dining experiences to your customers.
This Guest Article was written by Mike Spitalney. Mike is the CEO and founder of Everfund, a leading small business financing advisory firm. Mike is on a mission to help small businesses get the best financing for their needs and avoid the big C’s (confusion, clutter, complexity) of today’s lending world. To connect with Mike, you can inquire here or email him directly at mike@everfundcommercial.com, and be sure to grab a seat with the Fork CPAs to get your financials financing-ready.
