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, and 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.
- Refinancing a business loan could allow you to secure a lower interest rate, a longer repayment term or even a higher loan amount, assuming you meet the qualifying criteria.
- Multiple types of business loans, including term loans, working capital loans and equipment loans, can potentially be refinanced.
- To get started, review the terms of your current loan to understand what it would cost to pay off. Then, gather quotes from refinance lenders to find the most affordable option.
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 with a new business loan. That new loan pays off your old loan balance and then you repay the 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 term
- A lower monthly payment
- More favorable terms, like less frequent payments
You can try refinancing with the same lender or explore different funding options. Your new rates and terms will depend on the lender as well as both your personal and business finances.
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 the estimated costs of your new business loan seem high, it may be best to postpone a 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
When you lower your interest rates, you significantly reduce the overall cost of the loan.
Lenders set interest rates based on current economic conditions. As a result, you may be able to refinance from a 7.00% interest rate to a 6.00% rate, for example, simply because market rates have dropped since you first took out a loan.
Other factors can also influence your interest rate. If your credit or revenue has improved, you may be able to get a lower rate.
If you have a business loan for $100,000 with a 10-year term and a 10% APR, you’ll pay $1,322 per month and $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 $1,240 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 getting the new loan are less than $6,787, you’re better off refinancing.
Refinancing to a longer repayment period
Longer repayment terms won’t save you money on interest in the long run, but they can help you reduce your monthly payment. This can allow you to increase your business cash flow, which can be crucial for growth or stability.
If you have a five-year business loan for $50,000 at 10% interest, you’re paying $1,062 per month. Let’s say after two years of making payments, you’ve paid the loan balance down to $32,924 and you refinance for another five years at the same interest rate.
Your new monthly payment would be lower, around $700, but you would end up paying more in interest over the life of the loan.
How to refinance a business loan
1. Determine how much you owe
Review your existing business loan 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 loan, including any interest that will accrue between now and the payoff date.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 find the best refinancing deal for your needs. Some business owners want a lower monthly payment, which could mean refinancing to a longer term. Others want to get out of debt as fast as possible and may be looking for a lower rate.
Remember that extending your loan term can reduce your monthly bill, but it typically results in more interest in 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 you might qualify for before applying and whether you’ve improved in one or more areas, which can help you get a lower rate. Lenders typically look at the following criteria for a business loan refinance:
- Personal credit score: Most lenders set minimum credit score requirements to minimize their risk. To get the best rates and terms on a business loan, you generally need a personal FICO Score of 670 or higher.
- Business credit score: Business credit scores are used alongside personal scores to assess a business’s creditworthiness and how likely they are to make on-time payments.
- Time in business: Many business loans that can be used for refinancing require your business to be in operation for a set amount of time, such as six months or two years.
- Annual revenue: Lenders will use annual revenue to assess the financial health of this business, which impacts their ability to repay the loan.
Depending on the type of loan and your current financial status, you may also need to provide collateral for a secured business loan.
4. Gather your financial documents
Save time by gathering required documents in advance. In many cases, the financial documents you need can be pulled directly from your tax and accounting software.
Required documents vary between lenders, but here is what you’ll generally 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
- Profit and loss statements
- Cash for analyses
- Current loan statements
- Business debt schedule
- Business plan
- Valuation of collateral (if applicable)
5. Get quotes
Getting preliminary quotes can help you find the lenders and loan products that 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 allows you to fill out one simple form to be matched with potential loan offers. You can also contact banks, credit unions and online lenders directly to learn more about their current rates and loan options.
Keep in mind that the lender advertising the lowest rate may not be the cheapest option overall. Contacting lenders and speaking to a loan specialist can help get you a better idea of the rates and terms your business qualifies for.
6. Compare offers
After getting offers from multiple lenders, it’s important to compare:
- Origination fees: Origination fees may be a flat fee or a fixed percentage of the loan cost. If hefty origination fees apply, it could make refinancing less worthwhile.
- Prepayment fees: Some business loans have prepayment penalties, which can range from 1% to 5% of the cost of the loan if you pay it off early.
- Interest rates: Pay close attention to a loan’s interest rate, as it will affect both the cost of your monthly payment and the total cost of the loan.
- Repayment terms: Knowing the loan term is essential. While shorter terms will mean paying less in interest, the payments can put a larger strain on your business budget.
- Payment schedule: Some lenders require daily or weekly loan payments, while others only require one payment per month.
Carefully compare the details of each loan. For example, one loan may have higher origination fees, but a much lower interest rate. While that loan may have a higher upfront cost, you could save in interest over the lifetime of the loan.
You can use a loan calculator to compare monthly and total costs for each of your loan options.
7. Accept and get funding
Once you’ve chosen a lender, it’s time to accept your new loan. Make sure you read the loan agreement in detail before signing so there are no surprises.
Your lender will walk you through any remaining steps in the process, after which you’ll receive your funding. In many cases, business loans provide funds via direct deposit.
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 of funds with a fixed repayment term. You may qualify for a better rate if your revenue and credit 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 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 for your business. Having some equity in the equipment might help you secure a competitive rate with a refinance lender because the equipment acts as collateral for the loan.
- Commercial real estate loans. You can purchase property with a commercial real estate loan. Your business’s mortgage can be refinanced just as you could refinance a personal mortgage.
- Microloans. Microloans can help startups and underserved communities access small loan amounts. Similar to a term loan, you might qualify for a reduced rate if your business’s creditworthiness has improved.
Business loan refinancing vs. debt consolidation
Business loan refinancing and debt consolidation can both 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, ideally with a lower interest rate. This lower rate can reduce your interest charges, helping you save money and lower your monthly bill.
- 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 combine multiple loan payments into one.
Pros and cons of refinancing business loans
Pros
- You may qualify for a better interest rate, which could lower your monthly payment
- Lower loan payments could increase your business cash flow
- You could potentially be approved for a higher loan amount
Cons
- You may be required to pay a prepayment penalty on your current loan
- You may not find or qualify for a lower interest rate
- Refinancing to longer terms may cost more in the long run
Is refinancing right for your business?
If your qualifications are in good shape and market rates are favorable, refinancing could help you get a competitive rate that lowers your monthly payment and reduces the strain on your business’s cash flow. Your lender might even approve a higher funding limit, helping you tackle critical business expenses and expansions.
But the benefits of refinancing only apply if you’re able to qualify, and not every business is eligible for the best rates. You could also face a prepayment penalty on your current loan, which could offset your potential savings. Make sure you do the math to decide if a refinance really makes sense.
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.
For example, some lenders 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 know where you stand before you start applying.
Yes, but there are limitations. You can refinance current business debt with an SBA 7(a) loan if you meet the criteria. You can also refinance certain eligible projects, including commercial real estate, with an SBA 504 loan. However, you can’t refinance an expansion project with a 504 loan.
Yes, it’s possible to refinance an SBA 7(a) loan or 504 loan. To refinance a 504 loan, your business will need to be at least two years old, and the refinancing can’t be used to expand your business. And for both loan types, there may be other qualifying criteria. You can talk with a loan officer at a bank or lending institution that offers SBA loans to learn more about the requirements you’ll need to meet.
The best time to refinance a business loan is when you find a lender offering a lower interest rate than what you’re currently paying and will save money after factoring in any fees. However, you’ll only be able to qualify for the lowest rate if you have the credit and business history required.
If your credentials aren’t up to par, spend time boosting your credit score, improving your debt-to-income (DTI) ratio and increasing your annual revenue. This can help you receive a better rate when applying for a new business loan down the road.
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