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According to the Federal Reserve, small business loans average $663,000 but can range from $13,000 to $1.2 million. Add interest, and borrowing costs balloon — so it is no wonder business owners look for ways to manage and reduce this debt.
Thankfully, refinancing your business loan may save money on borrowing costs. It isn’t the best solution for every business owner, but those who qualify for a lower interest rate or longer term can get relief.
Here’s what you need to know about small business loan refinancing.
What does it mean to refinance a business loan?
Refinancing a business loan is similar to refinancing a mortgage or auto loan. Simply put, you’re applying for a new loan to pay off the existing business loan. The new loan’s terms, rate and fees replace your current ones.
The U.S. Small Business Administration reports that over 33 million small businesses exist throughout the country. 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 owner qualifies for the lowest interest rates, so loans can be expensive — sometimes topping 30 percent. 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 end up paying more over time.
Refinancing vs. debt consolidation
Your financial goals dictate how you choose to tackle your business debt. If you’re trying to decide between refinancing and debt consolidation, knowing the differences between the two can help with your decision.
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. Here’s a quick comparison between refinancing and debt consolidation.
|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|
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.
When to refinance a business loan
Refinancing can help you better manage your business debt, but it’s not always the best option. Yes, a lower interest rate allows you to save money and increase 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.
Here are a few things to look for when deciding whether this is the right time to refinance.
- Personal and business credit scores have improved
- Annual revenue has increased
- Increased time in business
- Prequalification tools suggest you may qualify for a lower interest rate and lower monthly payments
You’ll want to compare lenders and determine your potential savings before committing to refinancing — and press pause if you wouldn’t get a better deal.
How to refinance a business loan
The process of refinancing a business loan is similar to the process of getting a business loan.
1. Confirm your remaining loan balance
Review and confirm your remaining loan balance to determine how much you need to pay off the existing business loan.
2. Compare lenders
Research and compare lenders to determine your best option. You can choose among traditional and online banks, credit unions and finserv companies. These lenders may also offer SBA loans. However, remember loan requirements, interest rates, terms and fees vary based on the lender.
If the option is available, you can prequalify, which requires a soft credit pull. Keep in mind that when you apply for the loan, it will result in a hard credit pull, possibly temporarily dinging your credit score. If you plan to apply with more than one lender, completing your rate shopping within a period of 14 days increases the likelihood of the applications counting as one inquiry.
3. Gather required loan documentation
All lenders have business loan requirements that must be met. Many request documentation be provided to prove the business loan can be repaid, which can include:
- 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
Once the loan application is approved, take your time and carefully review the terms and conditions before moving forward.
How to choose the best refinancing option
With so many lenders to choose from, you want to ensure you make the best choice for you and your business.
Here’s what to consider when choosing the best refinancing option.
- Type of lender
- Loan requirements
- Payment frequency options
- Interest rate
- Loan terms
Use the above factors to determine potential savings with each loan. Consider building a chart to easily compare your options and using a business loan calculator to calculate each loan’s total cost.
FAQs about business loan refinancing
When a lender is willing to refinance a business loan varies by the lender and by 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.
Generally, prequalifying for a loan won’t impact your credit because it is a soft credit pull. However, when you apply for a loan, it will result in a hard credit pull. This may temporarily drop your credit rating by a few points.
Business owners should refinance when they can secure a lower interest rate and monthly payment. To ensure you get a better rate, you’ll want to review your personal and business credit score and the annual revenue to see if both have improved.