Refinance Business Loans: Every Step You Need to Take
If you took on commercial debt early in your business career, chances are the terms weren’t great. Business lenders base their decisions on factors including how long you’ve been in business and how much revenue your business is bringing in. As your business develops, those numbers will change — hopefully for the better.
This natural evolution means that, over time, you’ll be better positioned to borrow on more advantageous terms. Down the road, you could take advantage of an existing loan with less-than-stellar loan terms and refinance your business loan for much better loan terms.
What does it mean to refinance a business loan?
Refinancing a business loan means getting a loan with better terms paying off an existing loan that’s more expensive or disadvantageous in other ways.
The process basically amounts to trading one lender or loan product for another that works better for your business and financials. Your existing small business loan will be “retired,” which means it will be entirely paid off — and the new loan contract takes its place.
There are many ways refinancing can benefit businesses, including providing lower payments, longer repayment terms, lower rates or fewer fees. Many business owners choose to refinance short-term business loans or other expensive financing options with long-term loans or lower-rate loans from the U.S. Small Business Administration.
It’s important to remember that the benefit you get from the new loan arrangement must be significantly better than the old one. That way, you can justify the hassle of going through the refinancing process.
Should you refinance your business loan?
How do you refinance business loans?
There are specific steps you’ll need to follow to refinance your business loan(s). Review them carefully:
Clarify your needs. Make sure you’ve thought through what you want out of the refinancing process. There are various reasons to refinance — to access capital, lower your costs or payments and improve your business credit score by reducing your credit utilization ratio.
Is your goal to make your entire loan amount smaller, or simply to streamline your payments? Is your intention to take advantage of your improved credit score to get better terms, or are you just looking to find a lender with whom it’s easier to work? If your monthly payments are too high, how much lower would they need to be to make it worth going through a potentially time-consuming process to reduce them? Understanding the answers to these questions will help you determine if you should refinance your business loans.
Assess your debts. Make a list of every source of business debt you have. It’s essential to know which debt is the most disadvantageous to your business. That way, you can calculate how much you’ll need with a better financial product to wipe it out. For each loan, create a spreadsheet and record your remaining balance and term, APR, monthly payment and schedule, and fees and penalties.
Focus on your loans that have the highest APRs, fees and penalties, not those with the highest monthly payments. If you also feel you need to lower your monthly payments, you should consider refinance the loan with the high costs and payments.
Debt consolidation is one solution if you need to get a handle on your monthly bills. Consolidating your debt will enable you to bundle all your existing small business loans into one and you’ll make only one payment each month.
Gather financial information. You’ll need to have your numbers on hand to go through the refinancing process. Collect important business information, such as annual revenue, business and personal credit scores and total debt amounts. You’ll need the typical documentation you’d need to apply for a loan, such as:
- Credit history
- Business plan
- Balance sheet
- Profit and loss statement
- Cash flow statement
- Bank statements from last year
- Personal and business tax returns from the past three years
Do your research. Research and compare banks and alternative online lenders that offer refinancing services. Quite a few lenders offer the borrowers the SBA 504 Refinance Program, which might be a good option for you.
The key is to look at the numbers and do the math. Focus on lenders that might be able to give you a better arrangement than the one you currently have.
Apply. When it’s time to apply, you’ll have to put in your sweat equity. The application process for refinancing a business loan differs from lender to lender — each will have its own requirements and forms.
Choose the best loan. If you applied to multiple lenders at once, which is called loan or rate shopping, make sure you compare all of your offers and check the terms against your current loans. The actual offers will enable you to see exactly how each option will affect your business and budget.
Once you commit to a refinance loan, you should receive the funds to pay off your debt within approximately 30 days of approval, depending on your lender.
Can you refinance SBA loan debt?
Typically, you cannot refinance existing SBA loan. You might be allowed to in certain situations, such as if your needs have changed, but your current lender won’t handle the refinance.
One option for refinancing with the SBA is through its 504 Debt Refinance Program. The program launched in 2010 and was slated to end in 2012, but because it helped such a large number of people, the SBA reinstated it in 2015 and made it permanent in 2016.
SBA refinancing is open only to specific types of borrowers and loans. For example, the original purpose of the loan you want to refinance had to be to purchase or improve eligible fixed assets. Additionally, loans under the 504 Loan Program and other government-guaranteed loans are not eligible for refinancing under this program.
When it makes sense — or doesn’t — to refinance business loans
When you apply for a loan refinance, a lender will judge your business’ strength by reviewing your personal or business credit scores — or both. In addition, the lender will take into consideration how long you’ve been in business and review your annual business revenues, which can be a timely process. As a rule of thumb, a good time to refinance is when you’ve improved all those metrics since the last time you borrowed money.
Refinancing is not a good idea for those who already have loans with good terms or rates, or for those whose business metrics haven’t improved since they last borrowed. You definitely shouldn’t refinance if your current loan includes prepayment penalties that will cost more than your new loan saves you.
The bottom line
Refinancing is an excellent idea for businesses that have grown since the last time they applied for financing. Securing a new loan with improved terms can make a big difference in your business’ financial outlook and put you on good footing for the future.