How to refinance a business loan: 6 steps
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Many businesses rely on credit and loans to cover shortfalls or fund expansion. Refinancing a business loan is one way to adjust the terms and interest rate of your business’s current loans.
Refinancing a loan means applying for a new loan and using the money to pay off an old debt. Refinancing the loan with your current lender or a new one gives you an opportunity to save money, lower your monthly bills and improve your company’s cash flow.
Refinancing isn’t hard, but it does involve a few steps. We’ll break it down.
6 steps to refinance a business loan
You can refinance a business loan in six simple steps.
1. Gather your loan details
The first step in refinancing a business loan is to take inventory of your company’s existing loans. The key details to determine for each loan are:
- The type of loan (secured or unsecured, line of credit vs. term loan, etc.)
- The outstanding balance
- The interest rate
- The monthly payment
- The number of payments remaining
- The total amount you’ll pay over the remaining life of the loan
Each monthly loan statement should contain these details but you can always reach out to your lender to confirm if you aren’t sure. Having these details on hand is essential for the rest of the process.
2. Determine your goals
There are a few reasons that you might consider refinancing a loan, but the two most common are to lower the loan’s interest rate and to reduce the loan’s monthly payment.
If your goal is reducing your debt’s interest rate, you need only compare the rates of your existing loans to the rates available on new loans. If new loans are offering lower rates, refinancing could work.
If you want to lower your monthly payments, there are multiple ways to do that. Lowering the rate, but maintaining the same term is one way. You could also extend your loan’s term. However, that has the drawback of increasing the overall cost of the loan.
If you completed the first step of the process, you should know how many payments you have left and how much you’ll spend on each loan your business is currently carrying. You can look at new loan options and decide how much you’re willing to increase the total cost of a loan to decrease its monthly payment.
Note that if you have multiple loans, you can choose to refinance them individually or combine more than one into a single new loan.
3. Check your credit and eligibility
Because you’re replacing your old loans, you’ll need to qualify for a new loan or loans. Before you spend too much time trying to refinance, make sure you have a good shot at qualifying.
Some metrics to look at include:
- Your personal and business credit score
- Your debt-to-income ratio
- Your business’s revenue and profit
Having a high credit score, low debt-to-income ratio and high revenue will give you the best chances of qualifying for a new loan. Make sure you also look at any additional requirements lenders mention, such as a certain amount of time in business or lack of previous bankruptcies.
If you have a heavy debt load, poor credit or poor revenue, you might struggle to refinance with beneficial terms. Try looking into bad credit business loans, but prepare to wait until your financial circumstances are better to refinance.
4. Gather paperwork
Applying for a new loan to refinance existing debt means going through the full application process. Prepare to provide documentation including:
- Business financial documents such as profit and loss statements, balance sheets, accounts payable/receivable reports, payroll records, commercial lease
- Business tax ID number
- Bank statements
- Business licenses
- Proof of collateral (for secured loans)
- Disclosure of any other debts
- Any relevant contracts, ownership agreements, etc.
You’ll also have to provide personal identification documents, such as a driver’s license. Gather these documents before applying to keep the application process running smoothly.
5. Compare loan options
Do some research to find the right lender. You’ll want to look at a few different loan companies and compare different aspects of their loans, such as:
- Interest rates
- Origination and other fees
- Term options
- Minimum and maximum loan amounts
- Collateral requirements
Also, look into their reputation and customer reviews.
Choose the lender whose loans will help you accomplish your goals. For example, if you’re trying to lower the interest rate on your company’s debt, go with the lender with the lowest available rates. If your goal is reducing the monthly payment, you might focus more on lenders that offer long repayment periods.
If a lender offers prequalification, you can try to prequalify to get a better idea of the exact rates and terms a lender will offer to your business. As a bonus, prequalification requires only a soft credit check, so it won’t impact your credit score.
6. Submit an application
When you’ve identified the best lender for your company, it’s time to submit the final application. Fill out the required paperwork and wait for the lender to make a decision.
When to refinance a business loan
Most commonly, refinancing is used to lower interest rates and reduce monthly payments
Loan rates are based partly on index rates and market forces, but your company’s credit and revenue also come into play. That means deciding when to refinance can be hard.
It may make sense to refinance if market rates have fallen or your company has improved its revenue or credit score. If market rates have gone up and your company is struggling, it might be hard to qualify for a good refinancing loan.
FAQs about business loan refinancing
In theory, you can refinance a business loan immediately. If you want to refinance with the same lender, they might be unwilling to approve a new loan. And some lenders won’t refinance a loan until you’ve made a certain number of payments. Realistically, things like loan origination fees add up if you try to refinance frequently, so you’ll want to wait a few months to a year at a minimum between each refinance.
Yes, it is possible to refinance business debt with an SBA loan. Keep in mind that SBA loans can involve more paperwork and take longer for approval than other types of loans. The SBA may restrict when you can use an SBA loan to refinance other debt.
Refinancing may come at a cost. If your existing loan has an early repayment penalty, you’ll have to pay it. Your new loan may come with an origination fee or have a higher total cost than your previous loan. You need to crunch the numbers to determine if the additional costs are worth the benefit.