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According to the Federal Reserve, small business loans average $663,000 but can range from $13,000 to $5.5 million. With interest and other fees, borrowing costs balloon, especially if your business didn’t initially qualify for competitive rates.
Thankfully, refinancing your business loan may help save money — provided you can score a lower rate with a new lender. Here’s what you need to know about small business loan refinancing.
What does it mean to refinance a business loan?
Refinancing allows you to find another lender offering a lower interest rate or more favorable terms. You use the funds from your new loan to pay off your old loan, and then you stick with the payment schedule set by your new lender.
The U.S. Small Business Administration reports that over 33 million small businesses exist nationwide. According to the U.S. Census Bureau, 16.5 percent of these businesses borrowed money to cover expenses, invest and improve cash flow.
Not every business qualifies for the lowest interest rates, so many owners turn to short-term business loans or alternatives. These loans, and even traditional business loans, can be expensive. It isn’t uncommon to see interest rates above 30 percent for alternative lenders or those with bad credit.
When you refinance, you may qualify for a lower interest rate, a lower monthly payment, less frequent payments or an extended repayment period.
A lower interest rate can help you save money, but if you extend your repayment period without lowering your interest, you may pay more over time. Balancing these two can be difficult, so research to determine if refinancing is right for your business.
Types of loans that can be refinanced
Provided you and your business qualify, almost any type of business loan can be refinanced. The most common loans to refinance are term loans, equipment loans and microloans.
- Term loans from banks or alternative lenders could come with higher interest rates if you borrowed when your business was new. If you have since improved revenue and your credit score, you may qualify for a lower rate.
- Equipment loans are generally secured by the equipment you purchase. If you want to swap to an unsecured option, refinancing with a bank or online lender allows you to keep your equipment and potentially secure better terms.
- Microloans are small loans intended for startups and underserved communities. Like standard term loans, you may get a lower rate if your business has grown or your finances have improved from when you first borrowed.
Refinancing vs. debt consolidation
Your financial goals dictate how you choose to tackle your business debt. The two are similar, but debt consolidation replaces multiple loans — potentially from different lenders and with differing terms and interest rates — with a single loan from a single lender.
Both refinancing and debt consolidation are effective ways to decrease debt. However, if you are seeking relief from the high cost of a single business loan, debt consolidation is not an option. You will need to refinance. Otherwise, knowing the differences between the two can help with your decision.
|Pays off one existing loan||Pays off two or more existing loans|
|Replaces one loan with another loan||Replaces multiple loans with a single loan|
|Fixed, recurring payment||Fixed, recurring payment|
|May change your interest rate, monthly payment and repayment term||May change your interest rate, monthly payment and repayment term|
When to refinance a business loan
Refinancing can help you better manage your business debt, but it’s not always the best option. Ask yourself a few questions before you decide to refinance.
- Have my personal and business credit scores improved?
- Has my business’s annual revenue increased?
- Are average business loan rates lower?
- Has my business grown?
- Has my cash flow improved?
- What are my goals for refinancing this loan?
Pursuing refinancing may be worthwhile if you can answer these questions and have a clear goal in mind. And if you are already struggling to make payments, it may be best to talk to your current lender to see if there is a way to renegotiate your terms rather than refinance.
Compare lenders and determine your potential savings before committing to refinancing — and press pause if you wouldn’t get a better deal.
Pros and cons of refinancing a business loan
There are benefits and drawbacks to every business loan. A lower interest rate allows you to save money and improve cash flow. But if your personal and business circumstances haven’t changed since you initially took out the loan, lenders may offer you similar — or even higher — rates.
|Lower interest rate or monthly payment||Potential prepayment penalty on current loan|
|Better terms to improve cash flow||Rates may not be competitive|
|Shorter loan term could lead to faster repayment||Lengthy application process for each lender|
How to refinance a business loan
The process of refinancing a business loan is similar to the process of getting a business loan. If the loan application is approved, take your time and carefully review the terms and conditions before moving forward.
Confirm your remaining loan balance
Review and confirm your remaining loan balance to determine how much you still owe. At the same time, request a payoff quote. This is the amount you need to pay off the existing business loan, including interest that will accrue on the principal between the quote and the payoff date.
Both pieces of information should be available online or by contacting your lender.
Set a refinancing goal
Once you have your payoff quote, determine what your goal for refinancing will be. Ultimately, you will either be lowering the total cost of your debt, lowering your monthly payment or a combination of the two.
You can lower your monthly payment by extending your loan term or getting a lower interest rate. However, extending your loan term could potentially increase the total cost of your loan since it gives more time for interest to accrue.
To lower your monthly payment and the total cost, you will need to refinance at a lower interest rate.
Research and compare lenders to determine your best option. Between banks, credit unions and online lenders, you have quite a few ways to refinance your business loan.
If it is available, prequalify to preview your rates. This lets you see if the loan will be worthwhile for your business. And throughout the process, remember that your terms may be based on your personal and business finances. Every lender has its own requirements, so research these thoroughly before applying.
Gather required loan documents
Most lenders have similar business loan requirements that must be met. To demonstrate your business can repay your loan, you will likely need to have a low debt-service credit ratio (DSCR) and provide quite a bit of information, including:
- Accounts receivable and accounts payable
- Balance sheets
- Bank statements
- Business insurance
- Business license
- Commercial lease agreement
- Driver’s license or other photo ID
- Employee identification number (EIN)
- Payroll records
- Proof of ownership
- Financial projections
- Tax returns
The bottom line
Refinancing a business loan can be a smart move for many business owners. To get started, find a lender that offers refinancing. As long as you score a lower interest rate — or at least a lower monthly payment — it may be worth the time and effort it takes to apply.
Frequently asked questions about business loan refinancing
When a lender is willing to refinance a business loan varies by the lender and loan type. Some lenders may require you to have made a certain number of on-time payments on your current loan to prove your reliability, while others will simply want to see that you can handle your payments.
In most circumstances, the SBA does not allow you to refinance a loan it has guaranteed. Your lender must be unwilling to modify the terms of your current loan if you want to refinance, and you will need to document why you need additional capital or a loan modification to qualify.
Business owners should refinance when they can secure a lower interest rate and monthly payment. Review your personal and business credit score and your business’s annual revenue and cash flow. A lender will use these factors to see if you qualify for a lower rate.