Many business owners borrow money to help pay startup costs, fund an expansion or cover unexpected shortfalls. The drawback is that borrowing money means paying it back, which can be a drag on your company’s finances.

Refinance a business loan involves taking out a new loan to pay off an old one. It lets you adjust details like the interest rate, monthly payment and repayment term of the loan. However, deciding when to refinance a loan can be tricky.

Refinance your business loan if Wait to refinance your business loan if…
Market rates have fallen Market rates have risen
Your personal or business credit scores have increased Your personal or business credit scores have dropped
You’ve improved your business’s revenue or profitability Your company’s revenue or profitability are stagnant or falling
You got your initial loan when your company was young

Why to refinance a business loan

Refinancing a business loan means taking out a new loan and using that money to pay off the balance of an older loan. You can do so with your current lender or with a new one. 

Refinancing gives you the opportunity to change the details of your loan, such as the interest rate, monthly payment and repayment term.

Two of the top reasons to refinance a business loan are to reduce its overall cost or monthly payment.

If you can refinance to a business loan with a lower interest rate, that will typically help you save money on the loan in the long run. Lower rates mean less interest will accrue over the loan’s term.

If your goal is reducing your monthly payment, you can take a few paths.

Lowering the loan’s interest is one strategy, but it is not always possible, depending on your creditworthiness and the current state of the lending market. Another option is to extend the loan’s term. This lets you spread your repayment over a longer period. However, that increases the long-term cost of the loan by leaving more time for interest to accrue.

Another reason to refinance is to change the type of business loan you have. For example, refinancing could let you turn a line of credit with a variable interest rate into a fixed-rate term loan.

When to refinance your business loan

In general, you should consider refinancing when it can help you save money or offer another benefit to your company, such as by lowering your monthly loan payments to improve cash flow.

Market rates have fallen

Interest rates on loans are influenced by a wide variety of factors, such as your company’s credit score and financial situation, but there is one major factor you have no control over.

Rates on all types of loans rise and fall in response to market forces. One major influencer over the rate market is the Federal Reserve’s federal funds rate. The Fed adjusts this rate, increasing it to fight inflation and lowering it when the economy slows.

When the Federal Funds Rate is high, loans tend to become more expensive. When it’s low, loans tend to get cheaper. This is especially true for interest rates pegged to the prime rate and Secured Overnight Financing Rate, which move in lockstep with the Fed’s rate adjustments. Many SBA loan rates, for example, are pegged to prime.

If you got your loan when market rates were high and rates have since fallen, refinancing might help you save money.

Your personal or business credit scores have increased

Most lenders weigh credit scores and history heavily when determining loan interest rates. Your credit score helps lenders decide whether you and your business can be counted on to repay loans on time. A lower score translates to higher rates as lenders try to compensate for the risk of lending to you.

For business loans, both your personal and business credit score can influence rates (though small business lenders more often consider your personal score). If you’ve boosted those scores since getting the loan, you might be able to refinance at a lower rate.

You’ve improved your business’s revenue or profitability

Lenders tend to care about one thing: Whether you’ll pay back the money that you borrow. Lenders compensate for risk by raising rates, so companies that look risky to lenders tend to pay higher interest rates.

If you got your loan when your company was not making a lot of money, your business probably looked like a big risk. If its financial situation has improved, refinancing when you look like less of a risk can help you lower your loan’s rate.

You got your initial loan when your company was young

Another major risk factor in the eyes of lenders is the age of a company. New companies, especially those just a few months or a year old, are huge risks. The owners likely have limited experience and the business doesn’t have a track record of making timely payments.

All that translates into more expensive loans.

If you got a term loan when your company was young, a few years of success can show that your company isn’t a risk and lower your loan costs. 

Banks typically have lower rates and higher time-in-business requirements than online lenders, so if you recently passed the two-year threshold, try looking into refinancing with a bank.

When to hold off on refinancing a business loan

Refinancing is a good idea in many situations but there are times when it will cost you money and not bring many benefits.

Market rates have risen

If market rates have gone up since you got your loan, you might not be able to secure a new loan at a lower rate, even if your credit or business financials have improved.

That means refinancing will simply make your loan more costly.

Loan rates were on the rise throughout 2022 as the Fed approved sizable rate hikes six times in a row. If you got your loan within the last couple of years, now may not be the best time to refinance.

Your personal or business credit scores have dropped

If your company’s credit or your personal credit scores have dropped since you got your loan, you might struggle to qualify for similar interest rates. If the decrease in credit score is significant, you might not be able to qualify at all.

Your company’s revenue or profitability is stagnant or falling

If your business is getting less profitable or losing revenue, that’s a big red flag for lenders. You’ll have trouble refinancing at a good interest rate. Some lenders might require you to put up collateral or place a blanket lien on your business assets. Or they may simply refuse to approve your application.

Should I consolidate my loans?

If you have multiple loans for your business, weigh the pros and cons of consolidating your loans instead of refinancing them individually.

Consolidating means getting one new loan and using the money to pay off multiple existing loans. You trade several loans and their corresponding monthly payments for one loan and payment that’s easier to manage.

When consolidating, you have to consider many of the same factors as refinancing, such as whether you can secure a new loan with a lower interest rate.

The major advantage is the simplicity of only applying for one new loan and only managing a single loan going forward.

But remember that your existing loans likely all have different terms. If you consolidate, that might lengthen the terms of some loans and shorten the terms of others. That makes the math on whether you save money overall more complicated. You can use a business loan calculator to compare the results.

In general, consolidation is good if you’re looking for simplicity and to lower your monthly payments. Refinancing each loan individually might help you save more money overall by letting you maintain the current terms of each loan while lowering their interest rates.

The bottom line

Refinancing your business loans can help you save money. Look to refinance when you can lower the interest rate on your debt or save money.

Refinancing to lower your monthly payment and improve your cash flow can be appealing, but increases the overall cost of your debt.If you’ve run the numbers and refinancing looks promising, check out Bankrate’s guide on how to refinance a business loan.