Business Loan Refinancing: A Step-by-Step Guide

Many business owners go to lenders for help when they need money to grow their businesses. The most successful business owners always look for new ways to save money through lower interest rates on loans or more favorable payment terms. In the same way that lots of time and paperwork are needed when applying for a business loan in the first place, so too is it necessary when refinancing. When it comes to making sound financial decisions and contributing to growth, the effort is usually well worth it for small firms. 

There are many reasons why you might want to look into refinancing your business loan. If you’re having trouble making ends meet as it is, reducing your regular payments could help. Since you took out the loan, interest rates could have dropped. Monthly payments can be decreased by loan refinancing. A new loan may reduce your total repayment amount if the terms are set up in your favor.

What does business loan refinancing mean?

You can refinance a business loan by applying for a new loan with the same or a different lender and using the proceeds to pay down the old loan. Refinancing might help you save money and improve your company’s cash flow.

Financing into a loan with more favorable terms, such as those listed below, is the best way to accomplish this.

• Reduced interest rates.
• Reduced recurring costs.
• Lengthened time to pay off debt.
• Payments will be made less frequently.

Steps to refinance a business loan

Consider what advantages your company could reap from various refinancing scenarios. Refinancing could help you save money by lowering your interest rate and monthly payment. However, refinancing might add more stress to your budget if you don’t do it right.

There are a few things to think about before deciding whether refinancing is the best option for your company:

Understand Your Current Business Debts

You should start by making a list of your company’s debts, including the total amount owing, the annual percentage rate (APR), the monthly payments, the remaining duration of the loan(s), and any fees associated with paying off the loans early.

Not only will you be better equipped to analyze your options, but you’ll also be able to tell if refinancing is truly in your best financial interest.

Review your qualifications

Before beginning your loan hunt, you should identify what kind of loan your business is eligible for based on the criteria of the various lenders.

Your business’s annual revenue, length of time in operation, and personal credit history will all be considered by the majority of loan providers. Possible factors that lenders will look into include collateral, income, and bank balances.

When applying for a refinance loan, it is in your best interest to highlight any positive changes in your financial situation, such as an increase in your annual income or credit score, that have occurred since you first obtained your current loan. Similarly, if your company has been around for a while but only recently got your first loan, that can work in your favor when you want to refinance.

Gather application documents

One of the more time-consuming aspects of applying for a loan, this step should be initiated as early as possible to ensure that all necessary materials are at hand when the time comes. Most business loan applications need supporting paperwork such as tax records, statements from the business’ legal entity, bank statements, balance sheets, profit and loss statements, and business plans.

Research and compare lenders

The procedure of searching online for a refinancing option is very easy to navigate. Multiple loan aggregators exist for the purpose of facilitating the comparison of various loan providers and their respective loan programs. If you’d rather do business in person, your first stop should be at a bank or credit union in your area. Also, in some places, you may be able to get help from small business resources that focus on helping people in your area. 

Submit Your Application

Apply for a business loan either online or in person once you’ve found one you think will work for your company. So that you don’t hold up the procedure, make sure to provide all paperwork requested by your lender as soon as possible.

Certain lenders may give you an instantaneous decision when it comes to refinancing a company loan. Some may have a more involved application process, so you may have to wait a few hours or days to hear back. The application process for U.S. Small Business Administration (SBA) loans, which are guaranteed by the federal government and have enticing interest rates, can take several months.

N.B.: If you are a small business looking into refinancing possibilities, paying close attention to the closing charges and other origination fees that will be incurred is essential.

Is refinancing a business loan a good idea?

A firm might benefit in numerous ways from refinancing. The following are examples of some of the most significant outcomes.

Reduced cost of financing

The cost of financing includes all fees, interest, and other expenses incurred when obtaining financing. Refinancing a loan at a lower interest rate allows the firm to save money each month, which may be put toward investing in the company or financing growth.

Better cash flow

What really drives a company is its cash flow. Rent, salaries, and inventory are only some of the operating costs that this money covers. Refinancing can boost cash flow by lowering monthly payments or freeing up capital for other uses, reducing the need to re-direct revenue.

Increased funding amount

It’s common knowledge that more capital can improve a company’s prospects. With the extra money made available by refinancing a loan, a company can use it for whatever it wants, like making a big investment to improve internal operations or just paying overdue bills.

You have the potential to save money

In the time since you took out your loan, interest rates may have decreased from their initial high. Getting a better interest rate by refinancing or converting a variable rate into a lower fixed rate can help you save money on your loan payments.

Refinancing can be helpful for many business owners, but it is not always the best choice. There are several disadvantages associated with refinancing.

Credit Score Penalties

Your potential refinancing lender will want to check your credit history before giving their final approval. A hard credit inquiry will have a negligible impact on your credit score. It will have a temporary negative effect on your credit score. Refinancing won’t be a good choice if your credit score is already poor.

Prepayment Penalties

The absence of a prepayment penalty from your existing lender should be a top priority. In some cases, you may be subject to fees if you decide to prepay your loan. You may not come out ahead after paying the penalty and the interest on the refinanced business loan.

Collateral Requirements

In order to get a new loan, you may need to put up some sort of collateral with the lender. Collateral for a new loan might be anything of value to you, whether it be your business or your possessions.

You won’t actually save money

The savings from refinancing a business loan are not guaranteed. When you refinance a loan, you may have to pay extra fees, such as origination fees and closing costs. If you pay off your loan early, your current lender may impose fees that cancel out any potential savings from refinancing. In addition, refinancing may not be able to reduce your interest rate or your payments if your company hasn’t improved its credentials.

The Bottom line

A business may want to refinance its business loan if it can get a much lower interest rate, lower fees, or better terms for paying back the loan. It’s important to consider the pros and cons of refinancing a loan so that the costs don’t outweigh the savings.