Business Loans

How to Refinance Your Small Business Loan

Jun 20, 2019 • 6 min read
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      There are 2 primary reasons you may want to refinance your small business loan: lowered interest rates or a major shift in the market. 2020 has seen both. Interest rates remain at record lows, a key part of the Fed’s apparent strategy to buoy the economy in the face of the coronavirus pandemic, which has altered the economy in ways that for many of us feel beyond recognition. 

      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 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.

      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. 

      Can Your Refinance During Coronavirus?

      Lenders are still offering loans, so it’s definitely still possible to refinance your existing debts. This is especially true if you work in an industry like delivery, cleaning services, or telehealth, that have seen a boom. 

      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.

      About the author

      Lendio's team of experts is here to help you with every nook and cranny of your business. We'll make sure you have the best advice for financing, operations, management, hiring, and much more.

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