Getting out of business debt may feel like trying to outrun rapid lava flow.
If most of your monthly business budget is dedicated to paying off loans, it can also feel like your growth prospects are severely limited. You want to be selective with what you can do with your profits. But unless you want to have significant debts for the lifespan of your small business, you don’t have many options.
There are several reasons you may want to consider refinancing your small business loans. Perhaps, for example, the payments you’re making still primarily go towards the interest rather than the principle.
The goal of business debt refinancing is to qualify your business for longer-term lenders with more affordable rates. Of course, the “gold standard” for refinancing your business debt would be a U.S. Small Business Administration (SBA) loan. These loans have the best rates for the longest terms.
Because of the relatively strict underwriting criteria of SBA loans, they allow for straight refinancing of consolidated debts under the 504 Debt Refinancing Program. This means that all your business debts are rolled into one debt payment, which you can pay back over a longer term at a low interest rate (e.g., 10 years at 6%).
Of course, most small business owners won’t qualify for an SBA loan. But many options are out there for business debt refinancing; the first step is finding out if your debt is eligible. To get started, here are the five questions you need to ask.
Being eligible for business debt refinancing means there is room for improvement in your debt repayment situation, and you qualify for an alternative loan. To analyze whether your loan is currently the best it could be, take a long look at the following:
Consulting with a business lending specialist will help you determine whether you could possibly be making lower debt payments. Lowering your debt obligation is the overall goal.
Depending on the lender and the type of refinancing you qualify for, you may or may not have to pay the debt off in full. For example, if you have equipment loans in short-term debt, you might not qualify for a medium lender to refinance the full $100,000 you owe. However, the lender may choose to carve-out and refinance the short-term debt.
As the business owner, your credit score has a big impact on whether your business debt is eligible for refinancing, as well as which loans you qualify for. This doesn’t simply go for the primary business owner, either; lenders examine the credit histories of all owners holding at least 20% of the business.
The most worrisome situation would be if one of your business owners had a credit score below 600. In that case, you would most likely only be eligible for a short-term loan. While taking on a short-term loan for refinancing isn’t always advisable, it could certainly help if it is the only option available to you.
In some cases, you might want to wait to apply for refinancing until you’ve raised your credit score to at least 620, if not higher. Again, this applies to all primary owners of the business.
Declaring bankruptcy is known to be one of the worst things for your credit score. It often results in lowering a credit score by 200 points, and will remain in your credit history for 7-10 years.
Most long-term lenders with affordable rates won’t qualify anyone who is within four years of their bankruptcy’s discharge date. The SBA requires you to be three years out from the discharge date.
A tax lien is a legal claim the government has against your property if you neglect—or simply fail—to pay back tax debt. As you may expect, most lenders look negatively upon a tax lien.
If you want to apply for business debt refinancing but currently have a tax lien against your property, you should be proactive in at least reaching good standing with your tax debt. This means being aware of the entire amount you owe. Lenders will note if there is a tax lien against you and whether you are currently on a payment plan to take care of your tax debt. Again, this applies to all primary owners of the business.
Finally, the current state of your business plays a very important part in whether you will qualify for refinancing. Just as your credit score should show that you have a good history of making payments on time, your business’ current standing should show lenders that you will continue earning and being able to pay off debt.
Business health factors include monthly cash flow, gross revenue and net profit, and the length of time you’ve been in business. Generally, refinancing lenders want to see that you’ve been in business for at least one year, and ideally more than two years.
While an SBA loan is an ideal situation for debt refinancing, since it will offer the longest term at the lowest rate, most businesses will not qualify for one. However, short and medium-term loans can still be great options for lowering your business debt payment. Once you’ve assessed these five vital questions, it’s time to start exploring your options.