Business Loans

Guide to Refinancing Business Loans

Jun 20, 2019 • 10+ min read
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Table of Contents

      There are 2 primary reasons you may want to refinance your small business loan: lowered interest rates or a major shift in the market.

      Business owners have enough to worry about right now to continue paying higher interest rates when refinancing is an option. So what do you need to know about the refinancing process and how can you refinance existing small business loans? Let’s review.

      What Does Refinancing a Business Loan Mean?

      Refinancing a business loan is the process of taking out a new loan with better rates to pay off existing debts. This process allows small business owners to transfer loans with a higher cost of capital (think: short term loans, ACH loans, etc.) to loans with longer terms and lower interest rates (like a business term loan or SBA loan).

      The Benefits of Refinancing a Business Loan

      Refinancing offers several benefits for small business owners, including: 

      • Reduction in monthly payments
      • Reduction in total APR
      • Reduction in total cost of capital
      • Enough additional capital to avoid further loans
      • More convenient payment schedule

      What Types of Loans Can You Refinance?

      You can typically refinance traditional loan products like business term loans, ACH loans, business lines of credit, and business credit cards. If you have an SBA loan that you’re looking to refinance, that may be trickier. 

      Refinancing an SBA Loan

      Why would you want to finance with an SBA loan? SBA loans are government-insured so they generally have good terms. Here’s what the SBA says about refinancing current debts with an SBA loan:

      “It is possible to refinance loans that small businesses have outstanding with the SBA 7(a) loan program. Basic requirements include that the purpose of the original loan(s) would have been SBA eligible. The proposed loan needs to provide the borrower with a substantial benefit demonstrated by the payment amount being at least 10% less than the existing loan.”

      Should You Refinance a PPP Loan?

      If you expected more loan forgiveness than you receive with a PPP loan, you may be asking yourself if you can refinance the loan. The government created PPP loans in response to the magnitude of the coronavirus crisis. As a result, they have pretty much the lowest rates and best terms you’ll find. So, while full forgiveness may be your first choice, PPP loan terms are your second.

      What to Look for in Refinancing Options

      When looking for refinancing options, it’s important to keep in mind the potential benefits your business seeks. Refinancing has the potential to increase your monthly cash flow by decreasing payments. Done improperly, however, refinancing can actually increase your financial burden.

      You’ll need to work through a few considerations to ensure refinancing is a viable solution for your business:

      Understanding Your Current Business Debts

      Some of your old loans may have prepayment penalties. These penalties are essentially an attempt by lenders to recoup some of the interest they’ll lose when you pay the balance of your loan early. You’ll have to look through the fine print of your existing loans to discover whether you’ll face a prepayment penalty if you pay them off early.

      Prepayment penalties aren’t necessarily a nail in the coffin for businesses looking to refinance. When doing your calculations, if you add the prepayment penalty to the total of your debts and find that a refinancing option will still lower your monthly payments despite the added expense, it may be worth refinancing after all.

      You should know these details for each of your existing debts:

      • Current remaining balance: total payoff amount of your current loan(s)
      • Current monthly payment
      • Interest rate and APR
      • Remaining repayment term: number of months remaining on your loan(s)
      • Repayment frequency: do you make monthly, weekly, or quarterly payments?
      • Prepayment penalties

      With this information in front of you, it should be easy to decide which financing option will work for you.

      Limitations to Finding Suitable Refinancing Options

      While interest rates may be at record lows, that doesn’t necessarily mean finding an ideal refinancing option will be a walk in the park. Forced closures due to coronavirus and other impacts may change credit availability for small businesses. Some reasons your access to attractive refinancing options may be limited include: 

      • Bad credit score: especially if your score hasn’t improved since taking on your original debts
      • Recent bankruptcy filing
      • Outstanding tax liens
      • Young business: if your business isn’t much older than when you took out your original debts, your chances of getting better terms decrease
      • Inability to meet annual revenue requirements

      In short, if your business is in the same state as it was when you originally took on debt—or if the pandemic has significantly impaired your operations—it’s unlikely you’ll find better terms. As such, the timing of your decision to refinance is crucial. You want to refinance when your credit score is stronger and your revenues are steady to drastically increase your chances of finding better terms.

      How is Refinancing Different Than Loan Stacking?

      Loan stacking is the process of taking out new business loans without paying your existing creditors back first. Refinancing is different because you use the new loan to repay the initial debts. You will still have a balance on your loan that needs to be repaid, but the goal of refinancing is to secure better rates and terms.

      How to Know if it’s Time to Refinance your Business Debt

      Are you considering refinancing your business debt? It’s not a bad idea, especially if you’ve been in business for a few years and those early loans are costing you a pretty penny. But just like you wouldn’t want to rush blindly into a new loan, you don’t want to race off and refinance without first doing your due diligence.

      Why? Because refinancing is not always the best option. There are specific scenarios and times in the life of your business when it will make sense, and there are many others when it won’t. We’re here to help you recognize the go-ahead signs so you can seize the moment when it’s right. Below, we’re going to break down the 7 most common signs that indicate you’re ready to refinance your business loan. If you recognize any of these signs, there’s a good chance it’s prime time to refinance.

      1. Your Credit Score Has Improved

      When your business was brand new and you were desperate for capital, you probably had to take whatever financing you could find. We get it—starting a business is hard. If you had little to no business credit, you likely got stuck with higher interest rates. No, you didn’t necessarily make a bad choice at the time, but if your credit score has dramatically improved (which it likely has), refinancing could save you a lot of money.

      First, take a look at your credit score. If the first digit of your credit score has gone up, then that’s a good sign that it’s time to refinance. And if your score has suddenly peaked over 700, then that’s another positive indicator that refinancing could help you gain significant savings. If you need help moving your business credit in the right direction, take a look at our comprehensive business credit page. It’ll show you how your business score is calculated, tips to build better credit, and how to fix a low score.

      2. You’ve Gained Significant Equity in Your Business

      It might not feel like it sometimes, but year after year of monthly payments eventually puts a hefty dent in your loan. The bigger that dent is, the more business equity you have. And the more equity you have, the better you’re positioned to gain a better loan rate through refinancing.

      Plus, if you have a commercial mortgage, you can refinance to convert some of that equity into liquidated cash. Refinancing to draw equity out of your property or asset isn’t always a good long-term plan for dealing with debt, but it can help you consolidate loans or cover your business in an emergency.

      3. Current Interest Rates Have Dropped

      If current interest rates have dipped by at least 1 point, then now may be an excellent time to refinance. Keep an eye on the market and your industry to spot trends. Less risk for lenders means better loans for you. During times of economic growth, lenders will generally offer more favorable rates and terms.

      4. You Need Extra Cash Month-to-Month

      If your cash flow is low and you can’t find any other opportunities to cut costs, you may need to refinance. Even if you can’t obtain a better rate, you might be able to extend your loan repayment schedule—this extension will lower your monthly payments and free up some extra cash each month. Ideally, you’ll be able to find a better rate and optimal terms, but you may just have to pay more interest over the life of your loan in exchange for cash now.

      5. Your Business Has Grown

      Lenders don’t just look at your credit score when determining your interest rates, loan amounts, and terms. They also look at your financial statements (balance sheet, income statement, cash flow, etc.), business plans, collateral, accounts receivable, accounts payable—there are a lot of factors.

      Because lenders look at so many different influencers, several milestones could make it prime time for refinancing:

      • Credit score: As we discussed before, once you reach a credit score of 700 or higher, you should consider refinancing.
      • Revenue growth: If your annual revenue enters the 6-figure realm, lenders will likely offer you more favorable refinancing rates.
      • Years in business: 2 years is the magic number. Once your business has been in operation for 2 years, lenders are more confident in your trajectory and will offer better interest rates and terms.
      6. You Have Multiple Smaller Loans

      Starting and growing a business often takes multiple forms of financing. You could have a commercial mortgage, equipment financing, a short term loan, and more all at the same time. These loans can start to add up, and staying on top of all the monthly payments can become a complicated chore. 

      When this becomes an issue, you can consolidate your multiple smaller loans into one jumbo loan. This specific type of debt refinancing can help you establish a regular payment schedule, which can help you make your payments on time and prevent hurting your credit score. Plus, if you have multiple short term loans, they likely have higher interest rates. Combining them into one larger loan will probably help you free up some extra cash.

      7. You Committed to Sticking with Your Business

      Refinancing has a cost, so it only makes sense to refinance if you’re going to stay in business long enough to recoup the up-front expenses. You’ll have to pay appraisal fees, application fees, closing costs, and possibly prepayment penalties. You can get a pretty accurate breakdown of the expected fees ahead of time so that you understand what you’re getting yourself into.If you’ve looked through these signs and decided the time is right to refinance, congratulations! You’re one step closer to reducing your monthly payments and moving your business in the right direction. Refinancing can be intimidating, but we’re here to help. If you’re ready, check out our recent article, How to Refinance Your Small Business Loan, to learn how to refinance with term loans, business credit cards, and SBA loans.

      How is Refinancing Different Than Loan Stacking?

      Loan stacking is the process of taking out new business loans without paying your existing creditors back first. Refinancing is different because you use the new loan to repay the initial debts. You will still have a balance on your loan that needs to be repaid, but the goal of refinancing is to secure better rates and terms.

      Refinancing Can Improve Cash Flow and Simplify Your Life

      Successful refinancing of your debt will reduce your monthly payments and consolidate your debts into a single payment, reducing your stress and giving you more time to focus on building your business. If the timing is right, refinancing can be a no-brainer.

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      About the author
      Jesse Sumrak

      Jesse Sumrak is a Social Media Manager for SendGrid, a leading digital communication platform. He's created and managed content for startups, growth-stage companies, and publicly-traded businesses. Jesse has spent almost a decade writing about small business and entrepreneurship topics, having built and sold his own post-apocalyptic fitness bootstrapped startup. When he's not dabbling in digital marketing, you'll find him ultrarunning in the Rocky Mountains of Colorado. Jesse studied Public Relations at Brigham Young University.

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