Can You Refinance a Business Loan?

Yes, of course, you can refinance your business loan. You just need to figure out if your business really needs to take a new loan, and if so, why.

There’s an entire process involved in business loan refinancing, and you need to be thorough as you go through each step to ensure you make the right decisions that best align with your business needs and goals.

What is Business Loan Refinancing?

Refinancing a business loan means taking a new business loan and using it to pay in full the debt from your existing loan. Entrepreneurs refinance their business loans to gain access to a cheaper, longer-term business loan.

As an entrepreneur trapped in a cycle of large debt, the idea to refinance your business loan and move to a more manageable loan can seem like the best opportunity ever. It can be, but before diving into refinancing, it is best to do your research and figure out its pros and cons.

Why You Should Consider Refinancing Your Business Loan

Businesses choose to refinance their loans for various reasons. The most common ones include:

  • Reduced annual percentage rate (APR): Interest rates vary significantly based on the financial market weather. Rates can experience a considerable drop during the term of an existing fixed-rate loan. Through refinancing, you can attain lower rates and save thousands of dollars on interest payments and fees.

    As your business credit report gets better, you become eligible for lower rates. You can refinance your business loan to access these rates.
  • Reduced monthly payments: The amount of your business loan refinance is calculated based on the outstanding debt on your existing loan; thus, the refinance is always less than the original loan. As such, the reduced interest rates, together with the lower monthly payments, will help you save a hefty amount of money.
  • Less Frequent Payments: When refinancing, it is highly advisable to choose the option whose payment terms best align with your business goals. By doing so, you may receive a loan with less often payments or one that significantly reduces the overall payment term.

How to Refinance Your Business Loan

Once you have decided that you want to refinance your business loan, you need to follow some steps to ensure that the process is successful.

Listed below are eight steps to take to refinance your business loan.

Step 1: Develop a Refinancing Goal

People refinance their business loans for various reasons. It is important to determine your reasons and goals for the refinancing before initiating the process.

Are you refinancing your business loan to:

  • Lower your monthly payments?
  • Lower the total cost of your loan?
  • Have a more suitable payment schedule?

Regardless of the reason, you need to be fully aware of what you are getting into. When you refinance your business loan, it means you are applying for a new loan, and you will have to pay for closing fees again.

Establishing your goals gives you clarity and better judgment on whether it’s worth refinancing your business loan. While on it, also think about the ideal terms of payment in terms of amounts and duration.

Step 2: Review Your Business Debts

You will need to examine your business debts, both old and new if you have several. The examination should help you determine whether refinancing your business loan is the right thing to do for your business.

You should be looking to collect the information listed below.

  • Outstanding balance
  • Scheduled payment amount
  • Frequency of payments
  • APR
  • Outstanding repayment duration
  • Prepayment penalties

The above information is very crucial in your decision-making process, so ensure that you’re thorough and precise while compiling it.

Step 3: Examine Your Business’s Financial Reports

You need to have a clear picture of where your business is positioned financially. As such, you must check your annual revenue, personal credit score, and commercial credit score.

As you do that, remember all the documentation the lender will need to authenticate these numbers and collect them for the application process. Keep your profit and loss statement, bank statements, personal and commercial tax returns close by; they should help fast-track the process once you decide to refinance your business loan.

Step 4: Explore Your Refinancing Options

Once you have gathered all the necessary information, it is time to look into your loaning options. Various lenders have varying requirements, but your business must also look appealing to attract lenders.

The lender will look at the kind of debts your business has, the goals pushing your refinancing decision, and your business’s level of qualification. You need to look into the lender’s terms, their minimum requirements, and not forgetting to verify that they allow refinancing options with their loans.

It’s important to have the advice and support of an experienced attorney to guide you through the refinancing process.

Feel free to apply for your refinancing loan with several lenders. Some of your best options include:

  • Small Business Administration (SBA) Loans
  • Bank Loans
  • Alternative Lenders

SBA Loans

There are several options here, and although it’s quite hard to qualify for an SBA loan, you will enjoy the best available terms on the market once you do. You will receive longer-term loans at very favorable interest rates. However, if you already have an SBA loan, it is highly unlikely that you will be able to refinance it with another SBA loan.

Bank Loans

You can apply for a loan with your bank (where you have opened your commercial bank account). It is relatively hard to qualify for a refinancing business loan with banks because it poses a higher risk to the lender. However, if you manage to prove your financial responsibility and strength during your time at the bank, it could work in your favor.

Alternative Lenders

When seeking alternative lenders, bear in mind that you want a loan with better terms than your existing one, and one that will clear out your existing loan. If the options available don’t meet these requirements, keep looking until you find one that’s perfect for your business.

Step 5: Settle on the Best Business Loan Refinancing Option for Your Business

After exploring the various refinancing options available to you, it is time to settle on the one that best suits your business needs. Use all the information you have gathered on your business finances and existing debts to establish your figures and prioritize your options.

Step 6: Apply for Business Loan Refinancing

At this point, you have several options that you would like to apply for, so it is best to start applying and submitting applications.

Remember to attach all the documents you gathered in steps two and three in the application. Only apply for loan products you think you qualify for, which should also have the potential to meet the refinancing goals you established in step one.

Step 7: Chose Your Business Loan Refinancing Lender

Once you receive responses from the lenders you applied to, it is time to review and analyze their terms. Be thorough in this stage and ensure that you understand the numbers therein as these will determine your repayment duration and rates.

Don’t settle for any lender; choose the one whose terms best align with your business goals and needs.

Step 8: Refinance Your Business Loan

Once you settle on which loan to refinance with, sign the documents, and immediately after receiving the loan, use it to pay off your existing loan. You have now refinanced your business loan, and it is time to start repaying your new loan.

Types of Business Loans Suitable For Refinancing

You can refinance almost any type of business loan. Listed below are some of the most common types of loans that entrepreneurs refinance.

Term Loans

These are standard loans where the borrower is expected to repay the debt in monthly increments for the agreed-upon duration. These loans have a wide-ranging maturity period.

Term loans can last anywhere between a couple of months to over 30 years. As such, they can either be short or long-term.

Working Capital Loans

Working capital loans are mainly short-term debts that borrowers take to finance their day-to-day business operations. A good example is the government Certified Development Company (CDC) loan.

Entrepreneurs seek these kinds of loans in seasons when business is slow, and they are short of funds. Since these are short-term loans, businesses turn to refinance if they feel they need a longer duration to repay the loan.

Equipment Loans

Borrowers take these loans to cover the purchase of heavy business equipment, such as a backhoe or a commercial oven. Equipment loans have a short maturity period, and the equipment serves as the collateral.

In most cases, entrepreneurs must choose whether to buy or refinance new equipment.

Commercial Real Estate Loans

This type of loan is similar to a mortgage, except it is on a commercial property instead of a residential property. The borrower takes out a mortgage on a commercial property they own.

In this case, a commercial property defines a property used for income-generating purposes, for example, a rental property.

Microloans

These loans can be issued by individuals or approved microlending companies. They offer loans less than $50,000 with low-interest rates and short maturity periods. Entrepreneurs use these loans to launch their businesses or develop an emerging business.

Business Lines of Credit

This loan is quite unique as it offers the borrower a specific borrowing limit, and as long as that limit has not been reached, the borrower can borrow as much money as they need at any time.

The business is obligated to repay the amount used and cover the interest for the borrowed portion. In most cases, a business’s credit card will provide a line of credit, similar to banks and credit unions.

Benefits of Business Loan Refinancing

Refinancing a loan can prove very fruitful for your business in various ways. Some of the most significant benefits are listed below.

Lower Financing Cost

Refinancing your business loan significantly lowers your business’s financing costs. As such, it helps avail funds each month that you can invest in your business goals.

Improved Cash Flow

The reduced monthly costs gained from refinancing will increase your cash flow. As a result, it will avail money for larger projects so that you don’t have to use your monthly earnings for these expenses.

Higher Funding Amount

The main goal of business is to earn profits. Refinancing increases your chances of earning higher profits because it provides your business with more cash to invest in whichever way that’s suitable for your business.

What Are the Cons of Business Loan Refinancing?

Everything has its own benefits and disadvantages, and refinancing is not an exception. When you opt for refinancing, weigh the pros and cons against each other before making your final decision.

Below are the three main disadvantages of refinancing.

Negative Impact on Credit Score

When refinancing a loan, the lender makes a lot of tough inquiries with credit bureaus, which slightly affects your credit score.

Secondly, business loan refinancing technically increases your debt, which is slightly damaging to your credit score. No need to worry much though, you can restore your previous credit score over time as you continue making responsible payments.

Prepayment Penalties

The borrower incurs prepayment penalty fees when they pay part or all of their loan principal ahead of the agreed date. If that’s the case for you, you can expect to pay the prepayment penalties in your new loan as well, mainly because you’ll be using it to pay the old loan.

In most cases, however, the prepayment penalty fees are insignificant compared to all the savings you’ll make with refinancing. Examine the precise fees you are expected to pay before taking your refinancing business loan.

Collateral Requirements

Collateral requirements for your refinancing depend greatly on your credit score performance. If it has suffered since applying for our initial loan, you may be expected to provide collateral for the refinancing loan.

Secondly, the terms of your initial loan in regard to collateral are likely to trickle down to your new loan. If your collateral was taken as a guarantee in the first loan, the same is likely to happen with the new loan unless your business’s financial position has improved tremendously.

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