Small Business Loan Refinancing

Small Business Loan Refinancing

Almost all business owners take out loans at some point in their company’s operation. Some businesses may also take out multiple loans and want to consolidate those debts. That’s where refinancing comes in. Refinancing can help owners reduce the number of weekly or monthly payments that they have to make, and also help them secure a lower rate on the overall amount of their debts. Read More Expand

What is small business loan refinancing?

Business loan refinancing is when you take out a new loan to pay off an existing loan. Typically, the new loan comes with some kind of benefit that would motivate you to go through the process of obtaining the new loan. The loan may come with a lower monthly payment or a better interest rate, or maybe you are looking to consolidate multiple business loans under one new loan with a single monthly payment and a lower interest rate. There is really no limit to the number of times that you can refinance a business loan, however, if you continue to refinance a loan to extend the term and lower the monthly payment, you could end up paying much more interest in the long run, even if you continue to refinance for a lower APR. Before refinancing, do the math and make sure there is some upside to the transaction. Keep in mind that a lower monthly payment does not mean lower loan costs.

Refinancing can be a viable options under the following circumstances:

• Drop in interest rates
• Credit score increase that allows you to qualify for lower rates
• High credit card balances that you’re struggling to pay off
• Need to simplify monthly debt payments 
• Opportunity to save on interest 

How does small business loan refinancing work?

Refinancing a small business loan works the same as refinancing personal debt. In most cases, you’ll start by qualifying for a new loan. Make sure you compare the terms to ensure that refinancing will put you in a better spot financially. If you wish to move forward, the lender can pay the balance of the old loan and roll it into the new loan. You can then make payments on the new loan until the term ends.

When you are considering a business loan refinancing opportunity, it’s important to always run the numbers and see how much money you will be saving. Closings costs and other fees can cut into your potential savings, so be sure to double check if a particular offer is actually worth it.

Can a business loan be refinanced?

Most types of loans, including business loans, can be refinanced. Smart consumers should always be on the lookout for better deals or opportunities to refinance their loans. A refinance can help you get out of debt sooner, lower your monthly payment, or save money on interest.

What Goes Into Refinancing A Small Business Loan?

Before refinancing your small business loans, you should estimate the total refinancing amount that you need. To do this, add the current balance owed to the additional capital and origination fees of your current loans. Once you have this number, you can start evaluating which lenders you want to borrow from in order to refinance the loans. Once you’ve been approved and agree to an offer, you can use the funds to pay the already-existing debt that you have, in full. Some lenders may also offer the option to pay your creditors directly.

Why Refinance A Business Loan?

There are several reasons why a business owner would want to refinance a business loan. Often those reasons include being able to qualify for a lower interest rate, wanting a lower monthly payment, or wanting to consolidate multiple loans under one monthly payment and one ideally lower interest rate.

Whatever your reason for refinancing may be, it is important to do your research and crunch all the numbers to make sure that refinancing is a good option for you and your business. New loans can sometimes come with down payment requirements or other fees other than the interest rate that could make the cost of refinancing not worth the trouble. 

What Are The Pros And Cons of Refinancing A Business Loan?

Refinancing a business loan is a big decision that involves many variables that may make it more difficult to determine if business loan refinancing is right for you. You may be able to secure a lower interest rate, however, is the loan repayment extended to the point that you will end up paying more interest in the long run? 

Or maybe you want to refinance a business loan so you can get a lower monthly payment. Does the new loan come with an origination fee or a down payment requirement that will be a big immediate cost to cover that can eat up your savings? The point is, it’s important to do your research before signing on to a new loan with the intent of refinancing. Part of that research includes understanding the potential advantages and disadvantages of refinancing a business loan. 

Here are some of the most common pros and cons that business owners may experience when refinancing a business loan. 

Pros

• Better loan terms. Ideally, when refinancing, the new loan will have a lower APR, more flexibility, or some upside. Read the terms carefully before moving forward.
• Lower monthly payment. Refinancing a business loan can result in a lower monthly payment. As a result you can free up cash each month to invest in your business.
• Debt consolidation. In some cases, business owners refinance multiple business loans into one. As a result you can manage one monthly payment rather than several. Just make sure the decision is beneficial and cost-effective. 

Cons

• Higher costs over time. Although there could be many benefits to refinancing your current business loan in the short-term, it could end up that in the long run, it costs you more money. Extending your loan term to get a lower monthly payment now, can greatly increase the amount of interest you may need to pay in the long run, even if you obtain a new loan with a lower APR. 
• Cycle of debt. Oftentimes the best way to get rid of debt is to pay it off as fast as possible. Refinancing a business loan may extend your debt. It’s important to realize that not all debt is bad debt though. Consider what the debt is from and what impact  your decision will have moving forward.

Is Refinancing Right For My Business?

Knowing whether or not refinancing a business loan is right for you and your business is a complicated question that requires a lot of research. Ultimately, you need to figure out if refinancing your current loan is going to cost you more money or save you money. And, if it ends up costing you more money in the long run, is that extra cost worth the short-term benefit you could receive at the moment? 

Here are some questions you may want to ask yourself on top of crunching the figures when trying to determine if refinancing is right for your business.

1. Have APRs dropped significantly since you qualified for your current loan?
2. Does your current loan come with any early payoff penalties?
3. Are you keeping your business long-term or looking to sell when a good offer comes around?
4. Are your current monthly payments paying down the principal or mostly going toward interest?
5. Does your business have a level of equity it did not have before?
6. Is your monthly revenue significantly higher than it was before?
7. Has your personal and business credit scores significantly increased?
8. Are you facing a looming balloon payment?
9. Is your business now eligible for financing through the SBA when it was not previously?

As you can see, deciding whether or not refinancing is right for your business is more than simply crunching the figures. There are a number of other factors that should be considered as well.

Types of business loans that can be refinanced

Most business loans can be refinanced. Before refinancing, you’ll want to ensure that your current loan does not have a prepayment penalty. The following types of business loans can be refinanced in most cases:

• Working capital loans: Working capital loans are designed to help businesses cover short-term expenses such as day-to-day operations. They are usually unsecured which can translate into slightly higher interest rates than other forms of business financing that are tied to assets such as commercial property or equipment. This means that finding a refinancing deal on a working capital loan with a lower interest rate can be an extremely beneficial way to save money each month and improve overall cash flow.
• Term loans: Business term loans typically come with a fixed interest rate resulting in predictable monthly payments until the loan is repaid. A business term loan is a simple and stable way to get more cash flow to grow your business or refinance existing business debt. Term loans are one of the most common types of business loans.
• Microloans: Microloans are not as common as other types of loans since they are specifically for small amounts of money, but they can be refinanced if needed.
• Commercial real estate: The mortgage on your commercial property can also be refinanced just like a traditional mortgage or other type of business loan. With a commercial real estate loan, a refinancing can be extremely beneficial over the lifetime of the loan since you are repaying a large amount over a long period of time. Saving even just a small amount per month on interest can really add up. You may also be able to use a cash-out refinance to take advantage of existing equity to obtain more cash.
• Equipment loans: Equipment loans are another form of business loan that operates the similarly to a term loan. However, interest rates are often lower, and approval is usually easier with an equipment loan because the equipment is used as collateral to secure the loan. Refinancing an equipment loan is relatively simple, and cash-out options are even available that allow business owners to use the equity in their equipment to obtain more working capital.

No matter which type of business financing you choose to refinance, your new interest rate and loan terms should be better than those on your original loan. Always shop around and keep an eye out for new deals on refinancing your business debt. Consider getting prequalified to take advantage of the best deals.

How to qualify for a business refinance loan

Requirements to qualify for a business loan refinance are similar to those that were required to secure the original loan. Once again you’ll need to prove the legitimacy and success of your business as well as the ability to repay the loan. Lenders will want to ensure there’s no hardship that may prevent you from repaying the loan.

Required Documentation for Business Loan Refinancing

Before applying for business loan refinancing, you should have a few documents ready to submit:

• Two years of personal tax returns
• Two years of business tax returns
• Past two years of P&L statements
• Past two years of business financials
• Ownership information
• Owners’ resumes
• Business licenses
• Business history and overview
• Business leases
• Loan application history

How Can I Refinance A Business Loan?

The steps to acquiring a new business loan to pay off your old loan in an act of refinancing are not too different from the steps you took to acquire the original loan. You apply and qualify for the new business loan much as you did for the old loan. However, there are some important steps that you need to take before deciding whether or not you would like to refinance your current business loan. 

1. Define your refinancing goal: Are you looking for a lower monthly payment? A better interest rate? What is the purpose of your refinancing?
2. Determine how much you owe on your current loan: How much do you still owe on your current loan? What is your current interest rate, monthly payment, and anticipated payoff date? These are all important to understand to help you find a refinance option that is right for your business.
3. Research and compare lenders: Are you looking to refinance because you do not like working with your current lender? Research and compare alternatives to your current lender. Be sure to look at customer reviews to gauge user experience. Some lenders may make the process of refinancing easier than others. At PrimeRates you can shop new loan offers with no credit impact and no commitment. If you’re not sure refinancing makes sense or not, this is a great place to start.
4. Gather documents and apply: When you have found a lender you like with a refinancing option that is right for you, submit all the required documents, and once approved, pay off your old loan with the funds from the new loan.

What Is Needed Before Refinancing A Small Business Loan?

Profit/Loss Statements: Your profit and loss, or P&L statements give your net operating income, or your operating expenses subtracted from your gross revenue. This number should come out positive after refinancing.

Balance Sheets: Your balance sheet gives your quick ratio and working capital ratio, which borrowers look at when evaluating your application. These numbers are used to determine your financial health, as well as give you an idea of the collateral that you can use for a loan.

Invoices: Your invoices list all of the payments that are owed to you by customers.

Bank Statements: Your bank statements will give lenders an idea of how much money you have in the bank, your financial history and your average expenditures.

Credit Scores: A personal credit score above 640 is the most ideal score to have when applying for a small business loan. Your score is also one of the most heavily-weighed aspects of your application.

Tax Returns / Tax Info: Lenders may ask for multiple years of tax returns, so make sure you have at least the last two years of your returns ready to submit with your application.

The Best Options For Small Business Loan Refinancing

SmartBiz

Pros:

• Low maximum APR of 11.04%
• Faster to fund than standard SBA loans
• Long repayment terms of up to 10 years
• Easier application process than for traditional SBA loans

Cons:

• Difficult to qualify for
• Takes several weeks to fund
• More complex application process than other online lenders
• Higher fees than traditional online lenders

» MORE: SmartBiz Loan Review

LoanBuilder

Pros:

• No-commitment loan cost estimate
• Low maximum APR of 19.4%
• No origination fee
• No closing costs
• Access to up to $500,000

Cons:

• $20 returned payment fee
• Short repayment terms between 13 and 52
• Weekly repayments
• UCC-1 filing required

OnDeck

Pros:

• Low minimum credit score of 500 for term loans and 600 for lines of credit
• Funding within as little as 24 hours
• Access to amounts of up to $500,000
• Short, online application

 Cons:

• Potential for high interest rates, with APRs as high as 99% for term loans and 63% for lines of credit
• Daily or weekly repayments
• Short repayment terms between 3 and 36 months

» MORE: OnDeck business loan review

Is refinancing small business debt right for you?

In order to determine if a refinance is right for you, you will need to evaluate both your financing options and your own personal financial situation. It’s important to evaluate the entire situation and make sure decisions align with the vision of the company. In addition, make sure refinancing saves you money. You can use an online loan calculator to compare loan terms to help estimate potential savings. 

Business owners should always be looking for opportunities to save money on their expenses. Refinancing often offers the opportunity to save money which is why most business owners go this route. The sooner you can pay off your loan and get out of debt, the more cash flow you will have to pour back into your business.

What Are Alternatives To Business Loan Refinancing?

There are not too many alternatives to business loan refinancing, however, there are many alternative financing options that could be considered rather than using a conventional business loan in the first place. 

If you have a current business loan that you are paying on and you are not happy with it, then most likely your only option is to acquire a new business loan to pay off the old loan. That being said, if you do not have an early payoff penalty on the old loan, there may be some more unconventional things you could do to pay off the loan quickly. 

For example, you could consider selling equity in your business and using the money to pay off the loan. The main downside of selling equity in your company is that you are allowing other people into the decision-making realm of your business operations. If you sell too much equity, eventually, you could see a day where you are on the outside looking in as others are running your business how they see fit. 

Conclusion

Whether you’re looking to refinance or take out  a business loan, PrimeRates can help. Our lending partners can help refinance business loans and make the process easy. From extending a competitive offer to assisting with transferring the loan balance, our lending partners are top-rated for a reason. 

For all of your business financing needs you can count on PrimeRates to help you access the best offers in minutes.  Skip false advertising and hope. Replace it with real offers that are just for you. Simply submit some basic information and access offers from a network of vetted and trusted lenders. With no credit impact, investing a little bit of time in checking offers at PrimeRates can have a healthy ROI. Our lending partners are experts at what they do, therefore, you can avoid red flags or scams by working only with a network of top-rated lenders.

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