Table of Contents
- The 4 Steps to Refinance Business Loans
- Step 1: Create a Clear, Achievable Goal
- Step 2: Evaluate Your Business’s Finances
- Step 3: Find a Lender
- Step 4: Apply to Refinance Your Small Business Loans
- Who Should Use Small Business Loans to Refinance Debt?
- When is Refinancing Not the Best Option?
- Use Your New Knowledge to Refinance Business Loans
Refinancing a business loan may help reduce the cost of existing debt that’s cutting into your small business’s cash flow. But it’s important to make sure you make the right choice before taking on new debt.
Let’s go over the 4 steps you need to take to refinance your small business loans, including how to determine if refinancing your debt is the best financial move and tips to help you get the best offer.
The 4 Steps to Refinance Business Loans
The business loan refinancing process is straightforward, but it’s important to be thorough as refinancing a small business loan has a big impact on your finances. Take your time so you can make the right decision for your business’s financial health.
Step 1: Create a Clear, Achievable Goal
The first thing you want to do is decide what you want to achieve through business loan refinancing. There are significant benefits in refinancing, but you have to determine if they make sense for your situation.
Businesses refinance their loan debts to:
- Make payments less frequently
- Lower monthly payment amounts
- Reduce interest rates
- Consolidate multiple debts
Now, these reasons sound great to any small business with loan debt, but you have to take into account whether it’s possible to achieve these goals. Not every business is in a position where it’s both beneficial and feasible to refinance (more on that later).
Consider whether you’re in a position to be approved before moving forward. Ask yourself:
- Is it a sound financial decision to lengthen your debt repayment and, in turn, your total cost of financing?
- If you were in the lender’s shoes, would you give your business a loan?
If you answer “yes” to both of these questions, you can move on to step 2 of refinancing your small business loan debt.
Step 2: Evaluate Your Business’s Finances
You want to take a hard look at your current and future finances before applying to refinance business loans.
Assess Your Existing Debts
Owners who have taken out small business loans refinance debt to save money or stretch out their payments. Before you can do that, you have to look at your existing debts to determine what’s possible.
If you have one or more loans you want to refinance, you should list out the following to get a clear picture of each debt:
- Your current balance
- Remaining repayment term
- Payment interval
- Payment amount (multiply to find out how much it costs per month, year, etc.)
- Annual percentage rate (APR)
Looking at each number individually can help you accurately paint a picture of how much your debt costs you. Use this information to determine opportunities where refinancing can make a meaningful impact.
This information will be crucial when you compare any offers you have from refinancing lenders.
Small business tip: Don’t forget about prepayment penalties. Many small business lenders include these fees to ensure they make a certain amount of money on your loan if you repay it early. Depending on the price, prepayment penalties cut into the benefits of refinancing your business loan.
Small business tip: Don’t forget about prepayment penalties. Many small business lenders include these fees to ensure they make a certain amount of money on your loan if you repay it early.
Depending on the price, prepayment penalties cut into the benefits of refinancing your business loan.
Examine Financial Documents
A big part of obtaining a business loan refinance rate that makes it worth your time is having strong financial health. If your business isn’t doing well your rates won’t be any better than they are currently—if you’re approved for a new loan at all.
Take a look at all of the important financial documents you keep for your business, including:
- Profit and loss statements
- Bank statements
- Balance sheets
- Personal and business credit scores
- Tax returns
- Debt-service-coverage-ratio (DSCR)
While most of these are business loan requirements that your lender will want anyway, they also help you assess what you can get out of refinancing. Use them to determine whether you can afford long-term debt, or if any financial black marks make it unreasonable to make any financial move at this time.
If you’re unsure of whether or not it’s worth going through the application process, check in with some lenders. See of your business’s qualifications match their minimum requirements.
Step 3: Find a Lender
The lender you choose will be limited by what types of debt you want to refinance and what you qualify for based on your financial and business background.
Based on those criteria, you’ll have one of three lender choices:
- Small Business Administration (SBA)
- Alternative lenders
When you determine which type of lender fits your qualifications best, you can find the one that fits your goals for refinancing business loans the most.
Bank Loan Refinancing
Who Should Apply?
Small business loans from banks are considered the gold standard in the industry. Banks offer high principal amounts, long repayment terms and the lowest interest rates, which can fall between 3-6% for qualified borrowers.
Because of these benefits, however, they’re the most difficult to qualify for. Generally, only established business entities with a strong credit score will be eligible for funding through large, national banks. A smaller, regional chain may be slightly more lenient, but they’re still very selective.
To qualify, most require a “very good” to “excellent” personal credit score (think 700+ at the least), six-figure annual revenue and at least a couple of years in business.
Another drawback with banks is speed. Depending on what you’re seeking and your qualifications, the refinancing process could take over three months.
Small Business Administration (SBA) Loan Refinancing
Who Should Apply?
SBA loans are meant to make affordable financing accessible for small business owners who don’t qualify with banks. This makes their qualification criteria slightly less strict than banks.
If you’re approved, most 7(a) loans take months to fund. Express loans can be used to refinance certain debts in just weeks, but they’re maxed out $350,000.
Interest rates will be slightly higher than what you can get with a bank, but the SBA places caps on them to help keep them affordable. You can expect rates under 10% on these loans.
If the timing and criteria needed to obtain an SBA loan for refinancing don’t fit your small business, you may need to look into alternative options.
Alternative (Online) Loan Refinancing
Who Should Apply?
Refinancing with alternative online lenders is an option for many small businesses. Lower qualification requirements make it possible for those in almost all financial situations to refinance business loans with bad credit and lower revenues.
The technology involved in online lending also speeds the process up considerably. Instead of waiting weeks and months for approvals, many alternative small business loans can be approved and funded in a day or two.
Although they do offer options to refinance business loans that have up to 5-year repayment lengths, online loans generally have shorter terms than bank and SBA loans.
Since they work with less creditworthy small businesses, online lenders carry higher interest rates. It’s not uncommon for rates to start around 10% and rise with the type of loan you choose and your qualifications.
If a highly qualified borrower turns to an alternative lender for speed, they’ll still have to pay a higher price.
Step 4: Apply to Refinance Your Small Business Loans
When you have your goals aligned and have vetted potential lenders, it’s time to apply.
Applying for a small business loan can be as simple as uploading documents to online lenders and filling out some basic information. But it can also involve weeks of back and forth with banks.
Either way, the process itself is straightforward.
How much they need will be based on the lender and what refinancing you apply for. This can be as little as a few bank statements and bank account info. Banks and the SBA may ask you to hand over more financial documents. This part is simple: let the lender evaluate your application and wait to hear from them. Sometimes you’ll need to send them more financial info during this process. The lender will notify you of their decision. If you’re approved, they will come to you with their terms. At this point, you’ll need to weigh whether their rates, fees and term lengths match up with your refinancing goals. If you agree and sign, you just need to link your bank account (if you haven’t already), and your lender will deposit the funds directly.
Step 1: Give the Lender Information They Need
Step 2: Wait for Approval
Step 3: Get Approved
Step 4: Get Funded
How much they need will be based on the lender and what refinancing you apply for. This can be as little as a few bank statements and bank account info. Banks and the SBA may ask you to hand over more financial documents.
This part is simple: let the lender evaluate your application and wait to hear from them. Sometimes you’ll need to send them more financial info during this process.
The lender will notify you of their decision. If you’re approved, they will come to you with their terms. At this point, you’ll need to weigh whether their rates, fees and term lengths match up with your refinancing goals.
If you agree and sign, you just need to link your bank account (if you haven’t already), and your lender will deposit the funds directly.
This whole process can take weeks with banks and the SBA. Online lenders have it streamlined. The entire application, from submission to funding, can be done in less than 24 hours.
Who Should Use Small Business Loans to Refinance Debt?
Before you put these steps into action, you should consider whether refinancing your business loans is right for you.
Let’s take a look at some common examples of when refinancing is the right choice.
Your Creditworthiness has Improved
Your loan’s cost was impacted by your business’s age, revenue and credit score at the time of signing. But what you qualified for two years ago may not match up with what you can get today.
You can take that high-interest loan you got before and use the success you’ve had since to refinance it into a much more affordable option.
You Have Multiple Short-Term Loans
If you have taken out a few short-term loans, it could be a good idea to consolidate them into one.
Long-term business loan refinance rates make it cheaper than paying the more expensive short-term alternatives.
You Have Multiple Types of Debt
You can refinance more than just loans. Debts accrued on credit cards, business lines of credit, merchant cash advances and more can be consolidated and refinanced into a business loan.
Note, however, that some lenders are less likely to work with businesses that have certain debts. If you have multiple credit card balances or short-term loans (like merchant cash advances) lenders may not be willing to refinance them.
You Need a Cash Flow Boost
High monthly payments on small business loans cut into your available cash flow.
Refinanced loan payments can be significantly lower, giving you more money to put directly into business growth.
When is Refinancing Not the Best Option?
Sometimes it’s not the right time to refinance business loan debt. Here are a few reasons why.
The Savings Aren’t Worth It
You may have a few outstanding loan debts, making refinancing appealing. For a few reasons, however, refinancing business loans may not save you much, if at all.
- Your business hasn’t grown
- You haven’t built your business credit score up
- Prepayment penalties are too high
All of these reasons and more can make now the wrong time to refinance. If these circumstances change, however, you can revisit it later.
You’re Putting Off Debt for the Sake of Putting Off Debt
It may be tempting to refinance short-term loans to lower payments and pay them off over a more extended period, but that’s not always the right move.
Stretching out your debt payments could lead to paying more interest over time. A 15% interest rate for one year could be expensive for you now, but you’ll pay more if you cut the rate in half, but it takes you five years to pay the new loan back.
If you have the money to pay your current loan payment, pay it off. You pay more now, but you’ll be glad to have no loan payments on the books in a year. You’ll be free to use the money for growth, instead of creating a vicious cycle of debt.
You’re Not Eligible
Sometimes you aren’t eligible to refinance your business loans.
Having tax liens, bankruptcies or other red flags on your credit history can disqualify you with many lenders. Your current financial health may do the same if you’ve been experiencing slow sales or high expenses.
Use Your New Knowledge to Refinance Business Loans
Now that you know the what, why, how, and who of business loan refinancing, you can make your decision.
Find out whether it’s right for you by taking a good look at your current and potential finances. Reach out to lenders if you need to and apply when you’re ready.
It could be the difference in wasting money repaying debts and putting more into parts of your business that help you reach your goals.