How and When to Refinance a Business Loan

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How Does Loan Refinancing Work?

When you refinance a business loan, you essentially pay off one or multiple business loans by getting another cheaper or longer-term business loan. Refinancing a business loan works like this: you pay off all of your present business loans in a lump sum with a new, better business loan.

Refinancing a business loan can be a real business-saver for those deep in debt or stuck with an unaffordable loan. When you’re stuck in a cycle of expensive debt, refinancing a business loan is a great opportunity. But however exciting the prospect of refinancing a business loan might be, it’s important to look before you leap. Whether it’s less frequent payments, smaller payments, or a lower APR, there needs to be some aspect of your new loan that makes the refinancing process worth it and saves you money.

In this guide, we’ll go through what it means to refinance a business loan, the eight steps to refinancing, and the pros and cons of opting to refinance a business loan.

When Should You Refinance Business Loans?

How do you know when refinancing your business loans is the right step to take?

If you’ve improved your credit score, increased your revenue, or have a long business history, these are all good reasons to look into refinancing. These factors would likely make you eligible for a business loan with better terms that can help you save some money. Let’s take a closer look at some other factors to consider.

    You Previously Took a Quick but Expensive Loan

    Many business owners will take expensive, short-term business funding simply because they need cash fast. It makes sense—when your business needs cash, time usually isn’t on your side, and waiting it out for a loan with great terms isn’t always an option.

    With high APRs and short repayment terms, short-term financing can end up costing business owners over a thousand dollars a day.

    So, if you’ve taken on expensive, short-term debt because you didn’t have other options, a savvy next step is to find a longer-term, more affordable loan to refinance it with.

    Your Credentials Have Improved

    If your business is in a better position than it was when you first took on debt, you could be in the perfect spot to refinance your business loan.

    Though the underwriting process can rely on many different qualifications depending on the lender, generally speaking, almost any lender you work with will heavily consider your personal credit score, your business’s age, and your business’s annual revenue when deciding whether to extend an offer and decide the terms.

    As such, be sure to keep an eye not only on these three stats, but also on the crucial thresholds for each of them. This way, you’ll know when your credit score, your business age, or your business revenue has moved up a tier.

    For instance, if your credit score improved to over 640, then you could potentially be eligible to refinance your pre-existing debt with an SBA loan.

    Alternatively, if your business turns a year old, the range of loan products you’ll be able to access seriously improves. Not to mention, once your business starts making over $100,000 in revenue, your refinancing possibilities really open up.

    Even if you’re settled into your current debt schedule, if your qualifications have noticeably improved recently, you could be able to access even better, more affordable financing and really open up your business’s cash flow.

    You Need to Consolidate Multiple Sources of Debt

    Another common sign that it might be time to refinance your loans is that you have multiple sources of debt that are really complicating your business’s finances. This is actually called debt consolidation but is still a way to refinance business loans.

    In this case, you might be able to find a single loan to pay off all of your pre-existing debt and consolidate it into a single source of debt. Even if consolidating your debt doesn’t end up saving your business money, doing so could save you a serious headache by streamlining your business’s finances.

    When Refinancing Saves You Money

    Imagine doing the math after receiving the terms from a potential refinancing source—you take your new monthly payment and compare it to your current one, and you’re saving hundreds, thousands, or maybe even tens of thousands a month.

    If refinancing would free up your business’s cash flow that much, you’ll want to seize that opportunity—even if your current debt comes with a prepayment penalty (provided the penalty is smaller than your overall savings).

When Should You Skip Refinancing?

Refinancing is certainly an exciting idea, but as enticing as it is, sometimes it’s simply not the right step for your business.

While this isn’t an exhaustive list, if you find yourself in one of these two scenarios, you should probably hold off on making any moves to refinance business loans.

    When You’re Not Eligible

    Unfortunately, sometimes your business debt just isn’t eligible for refinancing. If you have a tax lien, if you’ve declared bankruptcy, or your business simply isn’t at its healthiest, then you might not be eligible for refinancing your pre-existing debt with a new, better loan.

    If your business is in this situation, take action to raise your business and personal credit scores by paying bills and vendors on time, if not early. Being in business for longer and increasing your business revenue will also help you become eligible for business loan refinancing.

    When Refinancing Won't Save You Money

    This may sound familiar, but just like you’ll be able to tell whether refinancing will save you money, it’ll also be apparent when it won’t save you money.

    One common hitch in the refinancing process is the prepayment penalty—many lenders will attach prepayment penalties to their loans because they don’t want to miss out on all of the interest you’d avoid by paying off your loan early. These prepayments penalties can be anywhere from nonexistent to cripplingly expensive. As such, it’s crucial to make sure that the savings or convenience that comes with refinancing business loans will justify any prepayment penalty you might have to pay for your previous debt.

How Do You Refinance Business Loans?

Now that we’ve defined what it means to refinance a business loan, let’s look at some concrete steps on how the process works. Here are the eight steps you’ll need to take to refinance your business loan.

Step 1: Decide on your refinancing goal.

Before you jump into the process, take a moment to think about why exactly you want to refinance your business loan.

Do you want to reduce your monthly payments? Do you want to reduce the total cost of your loan? Or do you simply want a more convenient payment schedule? Remember, refinancing business loans means applying for a new loan and paying for closing fees again, and you might also face fees from your current lender for paying your loan off early or breaking the terms of your contact.

It’s crucial to establish which goals you’re after before you kick off the process. This is also when you should consider what the ideal outcome of refinancing would be: Do you want smaller payments or maybe a longer-term loan?

Step 2: Look over your business debts.

Next, you’ll need to dig into all the debt that your business already holds. Whether it’s one or many, you’ll need to compile the following information for each individual source of debt that your business is liable to:

  • Balance currently owed
  • Scheduled payment amount
  • Scheduled payment frequency
  • APR
  • Remaining repayment term
  • Prepayment penalties

All of this information will be crucial in deciding whether refinancing is the right move for your business, so take your time and be precise while collecting it.

3. Look over your business finances.

Next up, it’s time to look at your business’s overall finances. In order to really know where your business is in terms of finances, you’ll need to gather a few numbers, like annual revenue, your personal credit score, and your business credit score.

While you’re at it, you should gather the documentation a lender will need to verify these numbers. Having a profit and loss statement, a year’s worth of bank statements and your personal and business tax returns at the ready will only speed up the process if you do decide that refinancing a business loan is right for you and your business.

4. Explore your business loan refinancing options.

With all of this information at the ready, it’s time to start looking into your options for refinancing your business loans.

Now, this step is far easier said than done, and doing it well is crucial. It will all depend on what kind of debt your business holds, how qualified your business is, and what your goals are for refinancing your pre-existing debt. Plus, you’ll need to consult the ranges of terms that the lender offers, along with the minimum requirements that they establish to work with them. Not to mention, you’ll want to double-check that a lender allows refinancing with their loans.

Having a well-versed advocate is a must. They’ll smooth out the process, and you’ll find your best business funding together.

You may decide to apply to several lenders for a loan to help you refinance. Some of your options include:

  • SBA Loan: These are some of the most difficult business loans to qualify for but SBA loans boast some of the best terms available. While only the most qualified applicants are eligible for these loans, the terms are well worth it. They’re usually longer-term loans so you have more time to pay them back, and they have pretty favorable interest rates compared to other lenders. One catch, though, is that you likely will not be able to refinance an existing SBA loan with another SBA loan.
  • Traditional Bank Loan: You might also choose to go the traditional route and apply for a bank loan from the institution where you have your business bank account. These loans can be more difficult to qualify for—since without the SBA guaranteeing a portion of the loan, it’s a greater risk for the lender. However, if you have been with your bank for a while and have proven to be responsible with your finances, you could have an advantage.
  • Alternative Lender Loans: If SBA loans and traditional bank loans aren’t for you, there are also alternative lenders you can apply to if you want to refinance a business loan. Keep in mind that you’re looking for a loan with better terms than your current loan, so don’t take one for the sake of taking one—only take it if it’s better and makes financial sense.

5. Decide which business loan refinancing option is the best fit.

Now that you know the three general options for refinancing and you have your paperwork gathered, you can decide which options you want to apply for.

To do this you’ll have to return to all of the data you compiled on your business’s pre-existing sources of debt, and then you’re going to have to do a bit of math and prioritizing. We’ll go over this process in more detail later, but we wanted to first establish that this step is a must-have before you decide to refinance your loan.

6. Apply for your refinancing options.

Once you know which loan or loans you want to apply for to refinance your business loan, you can start applying.

Take all of the paperwork you compiled in steps two and three and apply to the lenders who offer loan products that you think you’re eligible for. These products should also be the ones you think will be able to address the goals you established for refinancing in step one.

Of course, this can be easier said than done. If you’re feeling overwhelmed by the process, Fundera can help simplify things by working with you to find your best loan options.

7. Decide on your refinancing lender.

After you apply and hear back from your chosen lenders, take a look at the concrete terms that lenders can offer you based on your application.

Rather than the ranges and estimates that you considered when choosing which lenders to apply to, these hard numbers will be the real deal. If you accept the loan, those are the terms you’ll be following.

If you have more than one option, then it’s time to decide which has the better terms and makes the most sense for your business.

8. Refinance your business loan.

Finally, if you’ve found the right loan to refinance with, it’s time to take the last—and arguably biggest step—in refinancing a business loan. It’s time to sign on the dotted line, pay off your pre-existing debt with your new loan, and start repaying your new loan.

See Your Refinancing Options

The Bottom Line

So, with all of this information on refinancing business loans laid out before you, what’s your next step?

It really depends on your situation, and at the end of the day, only you will know your business well enough to decide whether or not you should refinance business loans. This guide should enable you to move forward confidently with making decisions around refinancing.

Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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