How To Refinance A Business Loan

By - May 9, 2023 - Corporate & Business

Thinking about refinancing a business loan? Refinancing may help your business get better loan terms and interest rates, making it easier to pay off debt. There’s a lot to know when refinancing, including the steps involved as well as the pros and cons of refinancing a loan. Here’s a look at how to refinance a business loan, plus other important information to keep in mind.

What is Business Loan Refinancing?

Refinancing a business loan is the process of getting a new loan to pay off all or part of existing loan debt. Just like personal loans or a mortgage can be refinanced, so can business loans. Refinancing can help your business when the new loan offers better terms, such as lower monthly payments or lower rates. Different lenders have different criteria for qualifying for refinancing. And, just as personal loans must be used for personal purposes, business loans must be used for business purposes. 

Loan Refinance Steps

There are several steps involved in refinancing a business loan. It’s important to set goals, know the balance of your business debt, see if you qualify, gather necessary documents, research and compare your loan options, and submit your application. 

Set Your Goals for Refinancing

What do you want to achieve by refinancing your loans? Knowing your goals can help you determine which refinancing option is best based on your desired loan terms or rates. Common goals include making payments less frequent, reducing your monthly payments, and lowering the overall cost of your debt.

Determine How Much Money You Owe

Look at your existing loan to see how much business debt remains and to gain a better understanding of the loan overall. It can be helpful to look at your outstanding loan balance, how much time you have left to pay off the debt, your loan schedule and payment amount, and your current interest rate. 

It’s important to note that some loans have prepayment penalties if you pay off your business debt early, which could impact your business if you refinance a loan. Be sure to look at the specific terms of your current loan before applying for a new one. 

See If You Qualify

Lenders look for specific business and financial qualifications when determining if your small business is eligible to refinance your business loans. They typically look at how long you’ve been in business, your personal and business credit scores, your debt-to-income ratio, your annual revenue and profit, your debt to service coverage ratio, and your financial accounts. 

If you notice areas where you’re struggling, such as having a bad credit score, try to resolve or improve these areas before applying for loan refinance. 

Gather the Required Documents

To determine if you qualify for loan refinancing, the lender will look at a variety of business and financial documents. This helps the lender understand the level of risk in lending to you. It also helps the lender identify fraudulent loan applications.  

Typically, a lender will request some or all of the following business and financial items when you apply for business loans:

  • statements from personal and business bank accounts
  • tax returns (personal and business)
  • business tax ID number
  • business permits and licenses
  • financial statements (balance sheets, profit and loss statements, etc.)
  • accounts payable and accounts receivable aging
  • proof of collateral
  • information about other debt you have
  • business insurance 
  • legal contracts
  • copy of commercial lease
  • current debt schedule 
  • driver’s license

Research and Compare Lenders

You can apply for financing from the company your current loan is through, or from a different lender. It’s helpful to compare your options. 

There are four primary types of lenders: traditional banks, online lenders, SBA lenders, and private lenders. Banks typically offer the best terms and the lowest rates. However, they can also be slow to provide funding and have strict requirements for business loans.

Online lenders typically have more flexible requirements for business loans and can quickly provide financing. However, they often have higher interest rates than other lenders.

SBA lenders are organizations that work with the United States Small Business Administration (SBA) to provide loans to small businesses. The SBA is a cabinet-level federal agency that serves as a resource for small businesses. SBA lenders offer competitive terms and rates. However, you’ll need to meet specific criteria and you may be restricted in how you can use the SBA funds. 

Terms can vary greatly with private lenders. Our attorneys can assist with private term sheets and loan agreements.

When looking at different refinance loan options, pay attention to the loan’s eligibility requirements, minimum and maximum loan amounts, interest rates, fees, payment schedules, collateral requirements, and repayment terms. Comparing these details in different business loans can help you determine which business loan is best for your small business. 

Some lenders may also allow you to prequalify for financing. The lender may typically run a soft credit check (so checking won’t hurt your credit score) to determine what terms and rates you might qualify for. 

Submit Your Application

After you choose a lender, you submit your application for the loan. The lender will decide if you’re approved to refinance your business loan and inform you of their decision. Some lenders may let you know right away, and some may take a few hours or days. In certain cases, SBA lenders can potentially take months to inform you if you’d been approved or not.

If you are approved for a business loan, it’s important to look at the rates and terms before accepting it. Make sure the rates and terms of the loan will help you reach your goals. 

Types of Business Loans You Can Refinance

Just as there are many types of personal loans, there are many types of business loans that can be refinanced.

Term loans: Business term loans are a common type of business loan that can be used to pay for resources like new equipment and other business needs. These loans are repaid over time, often in 5 to 10 years.

Working capital loans: These loans can be used to cover operational costs, such as rent, inventory, payroll, and other aspects of daily operations. 

Equipment loans: Equipment financing can be used to pay for equipment for the business. The size of the loan depends on the equipment needed and how expensive it is. Equipment loans are secured, which typically results in a lower interest rate.

Commercial real estate loans: These loans can be used to pay for the purchase and mortgage or lease of a commercial property. A loan from mortgage lenders can help you pay your business’s mortgage.

Microloans: A microloan is a smaller loan – around $13,000 on average – that is designed for new businesses. Microloans act as working capital and are usually paid back within a few years.

Business lines of credit: Lines of credit function sort of like business credit cards, but typically give you a higher funding limit than credit cards do. You can borrow, spend, and repay the money as needed throughout a set timeframe.

Merchant cash advances: Online lenders offer merchant cash advances to cover cash flow needs. The advance is based on your credit card sales, and you repay it via a percentage of your credit card sales each day.

Short-term business loans: Business owners of a small business can use short-term loans to cover unexpected cash flow issues, pay for emergency expenses, and for other short-term financial needs.

Can SBA Loans be Refinanced?

It’s possible to refinance an SBA loan, however it’s more difficult to do so compared to refinancing other types of loans and can only be done in specific circumstances. You will also have to meet certain SBA criteria to be considered eligible to refinance an SBA loan. For instance, your small business as well as the debt you want to refinance must each be at least two years old. 

Should You Refinance a Business Loan?

Refinancing a business loan may help make your debt more affordable, but it’s not always the best choice in every scenario. Consider the following to help you decide if now is the right time for refinancing business loans.

When to Refinance Business Loans

You may qualify to refinance business loans if you have increased your revenue, improved your credit score, or improved other qualifications for business loans. This may allow you to receive better terms and rates on your new business loan. If your existing business loan is expensive and you can get better terms and rates if you refinance, that may be a good idea. If you have been paying your commercial mortgage for a long time, you may have a decent amount of equity built up. All of this equity may help you get better rates when you refinance.

When Not to Refinance

It may not be a good time to refinance your business loan if doing so won’t save you money. Even with better interest rates and terms, you may have to pay fees like an origination fee and closing costs that cut into your savings. If you refinance and extend the length of your loan, you may end up paying more money in the long run, even if your new rates are lower or you’re paying less per month. 

Look at how much refinancing will cost versus how much it will save. Additionally, some business lending companies charge penalties if you repay your business debt too early, so be sure to keep that in mind when considering refinancing.

Advantages and Disadvantages of Refinancing Business Loans

There are pros and cons to refinancing, and all should be considered when deciding if this is the best financial decision for your small business. 

Advantages include:

Better interest rate: Refinancing may allow you to secure lower interest rates. These lower rates can reduce the total amount of money you’ll pay over time.

Lower monthly payments: If the new loan is covering only the amount of debt you have left from the original loan, the new loan is smaller than the original one. This can make your monthly payments lower than they were before refinancing.

Less frequent payments: You may be able to get better terms in your new business loan, such as less frequent payments. 

Better cash flow in your business: If you can reduce your loan payment, you’ll have more money to use in other areas of your business.

Disadvantages include:

Prepayment penalties: Depending on the terms of your original loan, the lender may penalize you for repaying the original loan early. These fees may partially offset the savings of your new loan.  

Affected credit score: A lender will make a hard credit inquiry, which negatively impacts your credit score, although only temporarily. Since refinancing reduces the average age of your credit, this can also negatively impact your credit score.

Lender may require collateral: Even if you didn’t need to provide collateral for the original loan, the lender may require you to use business or personal assets to secure new funding.

Potentially higher cost: If you extend your loan, you may have lower monthly payments, but the cost in the long run could be higher than the original loan would have cost overall. 

You might not qualify: Having bad credit can make it difficult to secure a new business loan. Even if you are approved to refinance your loans, you may not be able to get better rates or terms than what you already have.

How Interest Rates Affect Refinancing 

Getting a better interest rate is one of the single most appealing reasons to refinance a loan and get new business financing. Debt with a lower interest rate costs less in the long run than debt with a higher interest rate, so refinancing and getting a better rate can save your small business money. Rates are an important factor to consider when comparing your options for financing.

How Long Should You Wait Before Refinancing a Business Loan?

Each lender has different rules about when you can refinance a loan. The opportunity to refinance often depends on the type of financing you have and the terms of the loan, plus your credit score, revenue, payment history, and other business factors. 

Typically, you want to wait to refinance when you have better credit and more annual revenue than you did when you originally obtained the business loan. This may help you get better rates and terms on the new financing. 

Some types of loans also have specific requirements for refining. If your small business has an SBA loan, for example, the SBA requires your debt and your business to be specific ages.  

A Lawyer Can Help You Obtain Financing via a Business Loan

Are you a business owner wanting to refinance your business loan? A lawyer can help. Business lawyers can partner with business owners to help determine which type of loan will most benefit the business. They can also explain how different rates and terms will affect the overall cost of the loan and how that might impact your business. 

Business lawyers are knowledgeable about the requirements to refinance loans and can explain which documents you need when applying for refinancing, as well as if your small business is in a good position to seek new financing. 

Additionally, a lawyer can help you stay informed on any changing rules regarding financing business loans and direct you to helpful financial resources. If you find yourself in legal disputes related to your loans or lender, a business attorney can represent you in court.

Stevens Law Can Help Your Business

Stevens Law works with businesses of all sizes to support their growth through helpful legal services. Whether your business is a small business, a multinational corporation, or something in between, we’ll partner with you to support your efforts to refinance your business loans and in other business aspects. Our areas of expertise include startups, finance, corporate and general business law, and more. 

Contact Us

Contact Stevens Law at (614) 826-3100 to request a consultation.

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