How to Refinance Your Small Business Loans: Complete Business Loan Refinancing Process for Beginners

Last Updated on November 18, 2020

This page provides detailed information on how to refinance your small business loans. Here you will learn what refinancing is, how refinancing works, types of refinancing, the benefits of refinancing, complete business loan refinancing process for beginners, and all other important business loan refinancing information that you might need. Keep for updates.

What Is Refinancing?

Refinancing involves the process of reviewing and replacing the terms of an existing credit agreement, usually with respect to a loan or mortgage.

When a business or individual decides to refinance a credit obligation, they are effectively seeking to make favorable changes to their interest rate, payment schedule, and / or other terms set out in their contract. If approved, the borrower gets a new contract that replaces the original agreement.

Borrowers often choose to refinance when the terms of interest rates change significantly, causing potential savings on debt repayments under the new arrangement.

How Refinancing Works?

Consumers typically seek to refinance certain debts in order to obtain more favorable borrowing terms, often in response to changing economic conditions. The common goals of refinancing are to lower its fixed interest rate to reduce payments over the life of the loan, change the term of the loan, or move from a fixed rate mortgage to an adjustable rate mortgage (ARM) or vice versa.

Borrowers can also refinance because their credit profile has improved, due to changes in their long-term financial plans, or to pay off existing debts by consolidating them into one loan at a low cost.

The most common motivation for refinancing is the interest rate environment. As interest rates are cyclical, many consumers choose to refinance when rates fall. National monetary policy, the economic cycle, and market competition can be key factors that raise or lower interest rates for consumers and businesses.

These factors can influence interest rates across all types of credit products, including both non-revolving loans and revolving credit cards. In a rising-rate environment, debtors with variable-interest-rate products end up paying more in interest; the reverse is true in a falling-rate environment.

In order to refinance, a borrower must approach either their existing lender or a new one with the request and complete a new loan application. Refinancing subsequently involves re-evaluating an individual’s or a business’ credit terms and financial situation. Consumer loans typically considered for refinancing include mortgage loans, car loans, and student loans.

Businesses may also seek to refinance mortgage loans on commercial properties. Many business investors will evaluate their corporate balance sheets for business loans issued by creditors that could benefit from lower market rates or an improved credit profile.

Types of Refinancing

There exist several types of refinancing options. The type of loan that a borrower decides to get depends on the needs of the borrower. Some of these refinancing options include:

1. Rate-and-term refinancing

The most common type of refinancing. Rate-and-term refinancing occurs when the original loan is paid and replaced with a new loan agreement that requires lower interest payments.

2. Cash-out refinancing

Cash-out refinancing are common when the underlying asset used as collateral has increased in value. A transaction involves the withdrawal of value or equity in an asset in exchange for a higher loan amount and often a higher interest rate. In other words, when an asset increases in value on paper, you can access that value through a loan rather than selling it. This option increases the total loan amount but gives the borrower immediate access to funds while retaining ownership of the asset.

3. Cash-in refinancing

A cash-in refinance allows the borrower to pay down some portion of the loan for a lower loan-to-value (LTV) ratio or smaller loan payments.

4. Consolidation refinancing

In some cases, a consolidation loan may be an effective way to refinance. A consolidation refinancing can be used when an investor obtains a single loan at a rate that is lower than their current average interest rate across several credit products. This type of refinancing requires the consumer or business to apply for a new loan at a lower rate and then pay off existing debt with the new loan, leaving their total outstanding principal with substantially lower interest rate payments.

Understanding Business Loan Refinancing

When you refinance a loan for your business, you are, in effect, taking out a brand new loan, and then immediately using the capital you get from that loan to pay off your previously held debt.

Most often, small business owners use loan refinancing to replace high-value short-term loans with longer-term and cheaper loans, such as a multi-year loan or an SBA loan. The new loan should also be better than your previous loan.

You may have the option to work with a different lender, refinance using a different type of loan product, or even refinance several forms of debt at the same time into one new loan.

Reasons to Refinance a Business Loan

Before you begin, consider why you want to refinance your business loan. Your goal will guide the mortgage refinancing process from the start.

Should You Refinance a Loan to Extend Payment Terms?

Particularly if you initially took out a short term quick cash loan for your small business, the constant cycle of weekly or even daily loan repayments can take a toll on your business’ cash flow. When this happens, it’s not uncommon for business owners to pursue refinancing to extend those payment terms for a longer period.

If you have the chance to refinance and extend your loans payment terms using a cheaper and better quality loan option, this can be an excellent choice. However, if you find yourself trying to refinance a high-cost short-term loan with another similar product, remember that you can enter a dangerous cycle of increasing short-term debt.

Should You Refinance a Loan for Your Business to Consolidate Debt?

If your business currently has multiple forms of debt outstanding in the form of short-term loans, lines of credit, or business credit cards, you may be looking for a way to consolidate those multiple lines of credit into one manageable monthly payment. .

This method of loan refinancing is called debt consolidation, and it can be very helpful to business owners who need to simplify their cash flow.

However, when considering debt consolidation for your business, it is very important to make sure that the new refinanced loan product you eventually receive contains manageable terms that will not force you to fight for another line of debt.

Qualifying For a Small Business Loan Refinance

For most lenders, your personal credit score remains one of the most important factors affecting your ability to qualify for various business loan products or repayment terms. So if your personal credit score has jumped significantly since you originally applied for your business loan, you may be able to refinance at a better rate.

Your personal credit score ranges from 300 to 850 (the higher, the better), and evaluates your ability to repay your personal debts, such as credit cards, car loans and a mortgage.

The FICO score, commonly used in lending decisions, is based on five factors: your payment history (35% of your score), the amounts owed on credit cards and other debt (30%), how long you’ve had credit (15%), types of credit in use (10%) and recent credit inquiries (10%). Small-business lenders require a personal credit score for loan applications because they want to see how you manage debt.

To keep things simple, you might assume that every time the first digit of your credit score changes, it is probably worth checking to see if you might be eligible for better forms of financing.

In particular, reaching a credit score of 700 or above is a significant milestone where you can refinance your business loan and gain significant savings on interest.

Complete Business Loan Refinancing Process: How to Refinance your Small Business Loans

The business loan refinancing process can be quite tricky and you should do your best, especially if you are planning to apply for multiple lenders or if you are looking for an SBA loan. However, the exact process will depend on your lender, but in general, you’ll follow these steps:

  • Determine if refinancing is the best option: In some cases, you may be financially better off in the long run by sticking with your current loan. Conduct a thorough cost-benefit analysis to decide if refinancing is the right solution for your business.
  • Compare your options: Have a clear goal in mind before you start looking for a new loan — including what your ideal rates and terms are. This will help you compare lenders and shop for the best deal for you.
  • Submit an application: Prepare all the necessary paperwork requested by the lender and apply for the loan. Detailed documentation is usually required before you can refinance, and you’ll need to supply financial statements from the past two years, profit and loss statements, projected revenue and business tax returns.
  • Repay your previous loan: If approved, you can use funds from your loan to repay your original lender. Your new lender may submit the money for you, but in many cases, your loan funds will be deposited into your business checking account for you to submit a final payment.

When Is the Best Time to Refinance Your Business Loans?

Let’s have a look at some of the most common signs that you are ready to refinance your business loan and that refinancing will be a smart move for your business.

1. When your credit score has improved

As discussed earlier, your personal credit score remains one of the most significant factors impacting your ability to qualify for various business loan products or repayment terms. So if your personal credit score has made a major leap since you originally applied for your business loan, you may be able to refinance at a better rate.

2. Your Business Has Reached a Major Milestone

Beyond your personal credit score, certain changes within your business can also present milestones that open you to new business loan opportunities. Achieving any of these milestones, in particular, may indicate that you are ready to refinance your existing business loan for better interest rates and better terms:

Two Years in Business

When your business is very young, it’s harder for lenders to predict how you will manage cash flow and whether your business model can be viable over the long haul. As a result, businesses that are less than two years old are regularly downgraded by lenders in terms of loan eligibility.

Among many lenders, the two year anniversary of your business is a benchmark that significantly changes your loan eligibility. If you funded your first few years of business with a high-interest startup loan, reaching this milestone may present a good opportunity for refinancing.

Six Figures Annual Revenue

Reaching six figures of annual revenue, for many lenders, presents yet another milestone in your funding eligibility. If you’ve had a significant change in annual revenue since signing on for your original loan agreement, talk to your lender to see whether you may be eligible for refinancing.

3. You Are Getting Rid of Bankruptcy

Anyone who has experienced business or personal bankruptcy knows only too well the damage this experience can cause to your ability to access future financing for your business at an affordable cost. But if you’ve been in that position, you also know that the seven years after bankruptcy is sort of a magic number. This is the time when bankruptcy will no longer show up on your credit report and negatively impact your access to capital.

If you’ve had to take on high-interest debt while recovering from a bankruptcy, that six year milestone presents a great opportunity to refinance your business loan. Without the weight of the bankruptcy on your credit report, you’ll likely have access to a wider range of loan products at much better terms.

4. When You Are Consolidating Multiple Business Loans

For business owners who aren’t able to qualify for the full amount of funding they need within a single loan, it’s not uncommon to take out multiple smaller loans in order to piece together necessary financing.

This solution meets the needs of the business in a pinch, but over the long term these multiple loans–which tend to be short-term loans with high-interest rates–can add up to an overwhelming expense and cash flow burden for the business.

If you’re currently carrying multiple short-term loans for your business and have since improved your financial standing to be eligible for better forms of financing, debt consolidation is a great way to refinance your loans into a single, more manageable solution.

5. When the Terms of Your New Loan Outweigh Any Penalties

Although a change in your credit or financial situation may open you up to better loan products than you previously qualified for, this doesn’t always mean that refinancing your existing debt will be the best financial choice. This is particularly true if your existing loan carries a hefty prepayment penalty.

Remember, choosing to refinance your business loan effectively just means that you’re taking out a new business loan, then using the capital from that new loan to pay off the full balance of your previous loan as a single lump sum.

By the time you add up prepayment penalties and any other fees associated with refinancing, it may be that the savings on interest from the new loan aren’t enough to actually save you any money.

6. When You Need to Extend Your Repayment Schedule

Saving money on interest isn’t the only reason business owners might try to refinance their existing loans. If you have one or more short term loans with daily or weekly payments, you can try to refinance your business loan to get some relief from the cash shortage caused by these frequent payments.

In some cases, this can be a good reason to refinance particularly if your credit score has improved enough to offer better rates and terms on your new loan. You may not necessarily save money, but the relief to your cash flow situation still makes this a win.

Problems can arise, however, when you start refinancing one high-interest short-term loan with another similar product as a way of extending your payment schedule. This can quickly start a vicious cycle of debt on top of more debt that in the long-term will cause more problems for your business than it solves.

Where Is The Best Place to Refinance Business Loans?

Where is the best place to refinance business loans? The answer varies based on each borrower’s needs, preferences and credit history. The good news is there are a variety of options out there to consider.

1. Banks

When dealing with banks, you have the opportunity to get preapproved for several business loans, compare rates and identify the best offer for you. Banks may advertise low or competitive interest rates but often only offer those to borrowers they define as having “excellent” credit.

2. Credit Unions

A credit union is a nonprofit organization that returns profits to its members through higher savings rates as well as lower fees and loan rates.

Membership comes with benefits. Credit unions generally offer lower interest rates than banks do. According to the National Credit Union Administration, the average credit union interest rate on a five-year new-car loan in the third quarter of 2018 was 3.37%, while the average rate for the same loan through a bank was 4.93%.

If you have poor credit, a credit union may be more flexible than a bank. Credit unions build relationships with their members that allow them to offer a more personalized experience.

3. Online Lenders

With online lenders, you can easily shop around and evaluate rates and loan terms from the comfort of your living room. In some cases, you can preview offers from various lenders on one site so you can easily compare loans side by side.

Customer service may vary drastically from company to company. Research the lender’s customer service history before signing on the dotted line. As with banks and credit unions, you should check out reviews on sites such as Yelp, and be sure to check with the Better Business Bureau and Consumer Financial Protection Bureau to see if any complaints have been lodged against the company.

How to Pick the Best Lender to Refinance your Business Loans?

With so many companies offering refinancing! How can you be sure you have chosen the best company for your needs? Use these five tips to get the best business refinancing possible.

1. Check Your Credit Score

Your credit score plays a decisive role in the interest rates you will see when you shop for a loan. If you haven’t checked your FICO credit score for a while, be sure to take a look before applying for refinancing. If you repay your personal debts, such as credit cards, car loans, and mortgage on time every month, chances are your score has improved since you took out the loan.

2. Know Your Loan Stats

Your current loan balance will also affect the estimate of the interest you will receive when you shop. Contact your current lender and request information about your current loan balance and interest rate. This will be a great starting point for getting a new loan.

3. Research Lenders

Don’t be afraid to take plenty of time to compare refinancing lenders. Each lender charges its own set of fees and sets its own individual interest rates, and terms. Comparing a few lenders and requesting custom quotes from each will help you find the most affordable refinance possible.

4. Browse by APR, not Interest Rate

When you shop for refinances, you’ll typically see two different percentage rates listed: your interest rate and your annual percentage rate (APR). Your interest rate is the base interest rate you’ll pay on your loan, while your APR is your interest rate plus any annual fees included on your loan. Be sure you’re comparing APRs (not interest rates) when you consider each lender.

5. Know How Much Cash You Need

Taking a cash-out refinance? Know exactly how much money you need before applying for a new loan. Consolidating credit card debt? Add all of your balances together.

Benefits of Refinancing a Small Business Loan?

Refinancing generally brings with it a few benefits, including:

  • Lower rates: Refinancing can help you find a better APR, which in turn lowers your monthly payments and total cost of your loan. This could open your cash flow to invest back into your business for things like new equipment.
  • Borrow more: Some lenders will allow you to borrow a larger loan and use the remainder for other business expenses. This can help increase your working capital — but keep in mind that you may not lower your repayment if you borrow more than you owe.
  • Switch to a fixed rate: A loan with a variable interest rate can make budgeting for payments difficult. With a fixed-rate loan, your interest rates are locked in and won’t increase for the life of your loan. This helps create a predictable budget.
  • Release previous collateral: If you offered a business asset as security for a loan, you may be able to refinance to an unsecured loan and release that collateral. And if you used a personal asset as collateral, you could refinance to a secured loan and use a business asset instead.

How Much Does It Cost to Refinance a Business Loan?

Refinancing is meant to save you money, but you can count on some fees. The fees vary, but lenders should offer their cost before applying.

  • Origination fees: Many lenders charge an origination fees between 1% to 5% of the total loan amount.
  • Prepayment fees: Check the terms of your lenders. Some lenders charge a fee for early repayment — if you break from their loan, they lose money from your interest.
  • Underwriting fees: Underwriters review your application and the determine the terms of your loan.
  • Legal fees: Depending on the size of your business, you may need an attorney or financial advisor to help you determine the best deal for your business.
  • Appraisal fees: Offering collateral can lower the total cost of your loan, but you can pay hundreds or even thousands of dollars for an appraisal.
  • Closing costs: These costs cover loan packaging or a business valuation.

Refinancing a business loan can help your business succeed, but you will need to weigh all of your financing options when making your decision. Not all loans need to be refinanced, and you should be prepared to pay off the high fees on any previous loan before you take out a new one.

By following the steps outlined here, you will have what it takes to determine whether to refinance a loan for your business, and then identify and obtain the refinancing option that best suits your business needs.

We hope you will find this information useful. Do you have any queries on how to refinance your small business loans? Please feel free to let us know so we can assist you with any information you will need.

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