Refinance Business Loans: What You Need to Know
Refinancing a business loan can help you lower your monthly payments, take advantage of a lower interest rate or pay off your loan sooner.
However, not everyone can qualify for the lowest rates. Plus, refinancing may not be the best plan of action if you’re struggling to make payments due to cash flow concerns. Here’s what you need to know about business loan refinancing and tips for deciding if it’s a smart move for you.
What does it mean to refinance a business loan?
Refinancing a business loan is a lot like refinancing a mortgage: You replace your existing business loan by applying for a new business loan. That new loan pays off your old loan balance and replaces it with a new loan, ideally with better terms than your old one. You could refinance a business loan to get a lower interest rate, a longer repayment time, a lower monthly payment or more favorable terms, like less frequent payments.
You can try refinancing with the same lender or explore different funding options. You can look at business loans from local credit unions and online lenders, for example, or consider a lender that offers SBA loans.
Your new rates and terms will depend on the lender’s offerings, the loan balance and both your personal and business financial history.
Keep in mind that your existing loan might charge a prepayment penalty, while your new loan might have additional costs, such as origination, underwriting or SBA guarantee fees.
When refinancing can save you money
If your new loan’s estimated expenses seem high, it may be best to postpone a business loan refinance. But if you find a loan with a significantly lower rate or a longer repayment period, a refinance could help reduce your monthly bill and give your budget some extra breathing room.
Refinancing to a lower interest rate
The Federal Reserve influences interest rates based on current economic conditions, meaning base interest rates are constantly in flux. As a result, you may be able to refinance from a 7% interest rate to a 6% interest rate just because rates have dropped since you first took out the loan.
Other factors can influence your interest rate, too. If your personal or business credit score has gone up, for example, you may be able to get a lower rate. When you lower your interest rates, you significantly reduce the overall cost of the loan across its lifetime.
For example, if you have a ten-year business loan for $100,000 at a 10% APR, you’ll pay $1,322 every month and a total of $158,581 over the lifetime of the loan.
If you refinance that loan at an 8% APR after 3 years, still paying for the remaining 7 years, your monthly payment would drop to $1,241 each month, and you’d save $6,787 in interest over the life of the loan.
That means that as long as the fees associated with the new loan are less than $6,787, you’re better off refinancing.
All amounts rounded to the nearest dollar.
Refinancing to a longer repayment period
Longer repayment periods won’t save you money on interest in the long-term, but they can help you reduce your monthly interest payment. This can help you improve cash flow for your business, which can be crucial for growth or stability.
If, for example, you have a five-year business loan for $50,000 at 10% interest, you’re paying $1,062.35 monthly. Let’s say you’ve paid the loan down to about $40,000 after the first two years of the loan term, and you refinance again for another five years at the same interest rate. Your new monthly payment would be lower, at $849.88, but you would end up paying more in interest over the life of the loan.
You could also refinance the original $50,000 as a cash-out refi, using the equity to reinvest into the business.
There are two significant types of fees to watch out for when refinancing, which could ultimately cost you money and make refinancing less advantageous:
1. Prepayment penalties: Some lenders charge prepayment fees when you pay off your loan balance early.
2. Origination fees: Charged when you accept the loan and used to cover processing costs, these fees can be a flat rate or a fixed percentage of the total loan cost.
Check your current loan’s contract for potential prepayment fees and ask your new lender about origination fees. These can both add up quickly and could counteract money saved in interest.
How to refinance a business loan
1. Determine how much you owe
Review your existing business loan progress to ensure any new loan offers can provide better rates and terms than your current one.
Check your online account or contact your lender for the following details:
- Your loan’s outstanding balance
- How much time is left to repay the loan
- Your current repayment schedule, including weekly or monthly bill
- Your current business loan interest rate
- Your lender’s prepayment penalties (if applicable)
You can also request a payoff quote from your lender. This will show the total amount needed to pay off your existing business loan, including any interest that will accrue between now and the payoff date.
2. Set a refinancing goal
Defining a goal in advance can help you pinpoint the best refinancing deal for your needs. Some business owners want a lower monthly payment, which could mean refinancing to have a longer repayment term. Others want to get out of debt as fast as possible and may be looking for a lower interest rate.
Note that extending your loan term can reduce your monthly bill, but typically results in more accrued interest over the long run. Try to find the lowest business loan interest rate available to lower your payments while keeping the overall cost of your debt as low as possible.
3. Evaluate your qualifications
Review your business’s eligibility to determine what loan types and amounts you might qualify for before starting the application process.
Lenders typically look at the following criteria for a business loan refinance:
- Personal credit score: Most lenders have minimum credit score requirements for business loans to assess their risk of lending to you.
- Business credit score: Business credit scores can be used to assess a business’s creditworthiness and how likely they are to make on-time payments on a new loan.
- Time in business: Many business loans that can be used for refinancing require that you’re in business for a set amount of time, such as six months or two years.
- Annual revenue: Lenders will use annual revenue to assess a business’ s financial health and their ability to repay the loan.
Lenders look at additional criteria, too; they’ll typically look at your account balance sheets, for example, to assess your monthly cash flow and ensure you’re likely to have the funds for repayment. Depending on your current financial status and the loan product you choose, you might also need to provide collateral for a secured business loan.
4. Gather your financial documents
Save time by gathering required documents in advance. What you need will varies by lender, but here are some standard business loan documents you may need to provide:
- Proof of ownership or business license
- Employee identification number (EIN)
- Personal and business bank statements
- Personal and business tax returns
- Balance sheets
- Current loan statements
- Business plan
- Collateral information (if required)
5. Get preliminary quotes
Each lender may offer unique interest rates and loan repayment terms, so it’s important to compare your options.
Getting preliminary quotes can help you find loan products and specific lenders that will best meet your needs. By shopping around, you can ensure that you’re finding the best terms available to you.
You can start by using a marketplace like LendingTree, which will help you compare different lenders’ current offers and eligibility requirements quickly. You can also contact banks and lenders directly to learn more about their current rates and potential payment terms.
Keep in mind that the lender who advertises the lowest rate on their site might not be the one who will get you the best rate. Contacting lenders and speaking to a loan specialist can help get you a better idea of what’s possible for your current financial standing and business performance.
6. Compare offers
After getting detailed offers from each potential lender, it’s important to assess them carefully. You should consider:
- Origination fees: Origination fees are often a fixed percentage of the loan cost, but some lenders use flat-rate fees.
- Prepayment fees: Some business loans have prepayment penalties, which often range between 1% and 5% of the cost of the loan if you pay it off early.
- Interest rates: Pay close attention to a loan’s interest rates, because they can significantly increase the cost of the loan over its lifetime.
- Payment schedule: Some banks offer monthly or biweekly payment schedules, so consider which is best for your business’s standard cash flow.
- Ease of making payments: How easy or difficult it is to make payments will directly influence your experience with a lender, so ask about payment processes like automatic payments and online portals.
- Repayment terms: The length of the loan is essential to consider; while shorter loans will mean that you’ll pay less in interest, the payments can also dominate your monthly cash flow.
Compare all the details of each loan carefully. One loan may have higher origination fees, for example, but a much lower interest rate than one from another lender. While that loan may have a higher upfront cost, you could save in interest over the lifetime of the loan.
7. Accept and get funding
Once you’ve chosen a lender and an offer, it’s time to accept your new loan.
Your chosen lender will walk you through any remaining steps or paperwork needed. Once complete, you’ll receive funding.
In many cases, business loans will provide funds through ACH transfers, though some banks use wire transfers (which may incur a small fee).
Types of business loans that can be refinanced
Most business loans can be refinanced as long as your business meets the lender’s requirements. Here are the most common types of business loans that can be refinanced:
- Term loans. Term loans offer a lump sum funds disbursement with a fixed repayment term. You may qualify for a better rate if your revenue and credit score have improved since the original loan.
- Working capital loans. A working capital loan (a type of term loan) can help cover short-term business expenses, such as payroll, daily operating costs and inventory. As long as you meet the lender’s criteria, you can refinance working capital loans.
- Equipment loans. Equipment loans help you purchase or upgrade equipment or machinery needed for your business. Having some equity in the equipment might help you secure a competitive rate with a refinance lender since the equipment acts as collateral for the loan.
- Commercial real estate loans. You can purchase or lease property with a commercial real estate loan. Your business’s mortgage can be refinanced just as you can refinance a personal mortgage.
- Microloans. Microloans can help startups and underserved communities access small infusions of capital. Similar to a term loan, you might qualify for a reduced rate if your business’s creditworthiness has improved since you originally took out the loan.
Business loan refinancing vs. debt consolidation
Business loan refinancing and debt consolidation both can help you manage your debt. However, it’s important to understand the key differences between the two.
- Business loan refinancing: A lender pays off your existing business loan and issues a new loan, hopefully with a lower interest rate and monthly payment. This lower rate can reduce your interest charges, helping you save more money.
- Business debt consolidation: You can combine multiple loans into a new consolidation loan with one easier-to-manage payment. While getting a lower rate is an added benefit, the primary purpose of business debt consolidation is to simplify your various loan payments.
If your ultimate goal is to save on interest, a business loan refinance could be the right choice for you. If you want to consolidate multiple existing loans and payments into a single loan, consolidation may be the right move.
Pros and cons of refinancing business loans
Pros
- Lower interest rate
- Lower monthly payment
- Better cash flow
- Increased funding amount
Cons
- Possible prepayment penalties for current loan
- Longer terms may cost more in the long run
- You might not find a better rate
If your qualifications are in good shape and market interest rates are favorable, you could secure a competitive rate that lowers your monthly payment and reduces the stress on your business’s cash flow. Your refinance lender might even approve a higher funding limit, helping you tackle critical business expenses and expansions.
However, not everyone can qualify for the best rates or better loan terms, which could make it difficult to lower your payment. You also might need to pay a hefty prepayment penalty on your current business loan, which could offset your potential savings. And while refinancing for a longer term could reduce your monthly bill, it will likely result in higher interest charges over the life of the loan.
Frequently asked questions
How long you should wait to refinance a business loan depends on multiple factors. Some lenders may have specific requirements, but others don’t.
Some lenders, for example, may require a specific number of timely payments on your current loan, while others will rely on your credit score and business performance to determine eligibility.
Ultimately, waiting until your company’s financial standing has improved is wise before approaching a refinance lender. Be sure to check your personal credit score and your business credit score in advance to help access the most competitive rates.
While the SBA does allow refinancing in specific circumstances, it’s generally more complex than other types of refinancing. If your current lender can’t modify your existing SBA loan terms, you may be able to refinance with another SBA lender.
If you meet the requirements, you can refinance an SBA 7(a) loan with an SBA 504 loan. You can also consider refinancing current business debt into an SBA 7(a) loan or a commercial loan refinance with the SBA 504 Debt Refinancing Program.
Keep in mind that your business and current loan must be at least two years old to be considered for an SBA refinance.
The best time to refinance a business loan is when you find a lender offering a lower interest rate than you currently pay. However, it’s essential to review your personal and business credit scores, along with your company’s revenue and cash flow to ensure you meet the lender’s criteria.
If your credentials aren’t up to par, spend time boosting your credit score, improving your debt-to-income (DTI) ratio and increasing your business’s annual revenue. These factors can help you receive the best rate when applying for a new business loan. Alternatively, you can consider a startup business loan or bad credit business loan to access the funds you need to expand your business to new levels.
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