Many business owners have confusion between refinancing and consolidation, and it’s an understandable mistake. While consolidation and refinancing are both ways of changing the form of existing loans, they have different purposes and intentions.
Let’s say a business owner has three remaining loan amounts to pay off: $8,000 at 6.5% interest, $11,000 at 5.8% interest, and a $22,000 loan at 6.1% interest due to purchasing a vehicle.
Consolidation: If this business owner sought out consolidation, they would look for a loan that would pay off the $41,000 in remaining debt under a single loan. If their credit merits a lower interest rate, they might also find that they’re paying less.
Refinancing: This particular business owner may look to refinance that $8,000 loan. In refinancing, they’d receive a loan of $8,000 to pay off that debt with an interest rate below 6.5%, saving them money.
Both refinancing and consolidation are intended to ease the financial burden on business owners, and some business owners use them in conjunction to maximize savings. This is particularly effective if your credit has improved dramatically. You might consider consolidating multiple debts, then, down the line, refinancing the loan you received to consolidate.