Many businesses rely on credit and loans to cover deficits or finance expansion. Refinance a business loan is a way to adjust the terms and interest rate of your current business loans.
Refinancing a loan means applying for a new loan and using the money to pay off an old debt. Refinancing the loan with your current lender or a new one gives you the opportunity to save money, reduce your monthly bills and improve your business cash flow.
Refinancing is not difficult, but it does involve a few steps. We’ll break it down.
6 steps to refinance a business loan
You can refinance a business loan in six simple steps.
1. Gather your loan details
The first step in refinancing a business loan is to take inventory of your business’s existing loans. The key details to determine for each loan are:
- The type of loan (secured or unsecured, line of credit vs. term loan, etc.)
- The outstanding balance
- The interest rate
- The monthly payment
- The number of payments remaining
- The total amount you will pay over the remaining term of the loan
Each monthly loan statement should contain these details, but you can always contact your lender to confirm if you are unsure. Having these details at hand is essential for the rest of the process.
2. Determine your goals
There are several reasons why you might consider refinancing a loan, but the two most common are lowering the interest rate on the loan and reducing the monthly loan payment.
If your goal is to reduce your debt interest ratejust compare the rates of your existing loans to the rates available on new loans. If new loans offer lower rates, refinancing might work.
If you want to reduce your monthly payments, there are several ways to do so. Lowering the rate but maintaining the same term is one way. You can also extend the term of your loan. However, this has the disadvantage of increasing the overall cost of the loan.
If you’ve completed the first step of the process, you should know how many payments you have left and how much you’ll spend on each loan your business currently takes out. You can review new loan options and decide how much you’re willing to increase the total cost of a loan to lower its monthly payment.
Note that if you have multiple loans, you can choose to refinance them individually or combine several into one new loan.
3. Check your credit and eligibility
As you are replacing your old loans, you will need to qualify for one or more new loans. Before spending too much time trying to refinance, make sure you have a good shot in qualifying.
Some metrics to consider include:
Have a high credit score, a low debt ratio and high income will give you the best chance of qualifying for a new loan. Also be sure to consider any additional requirements mentioned by lenders, such as a certain amount of time in business or no previous bankruptcies.
If you have heavy debt, bad credit, or low income, you may find it difficult to refinance with favorable terms. Try to look in business loans with bad creditbut be prepared to wait until your financial situation improves to refinance.
4. Gather the documents
Applying for a new loan to refinance an existing debt means going through all the application process. Be prepared to provide documents including:
- Commercial financial documents such as profit and loss statements, balance sheets, accounts payable/receivable reports, payroll records, commercial leases
- Company tax identification number
- Bank statements
- Commercial licenses
- Proof of collateral (for secured loans)
- Disclosure of any other debt
- All relevant contracts, ownership agreements, etc.
You will also need to provide personal identification, such as a driver’s license. Gather these documents before applying to ensure a smooth application process.
5. Compare loan options
Do some research to find the right lender. You’ll want to look at a few different lending companies and compare different aspects of their loans, such as:
- Interest rate
- Set-up fees and other fees
- Term options
- Minimum and maximum loan amounts
- Warranty Requirements
Also look at their reputation and customer reviews.
Choose the lender whose loans will help you achieve your goals. For example, if you’re trying to lower the interest rate on your business debt, go with the lender with the lowest rates available. If your goal is to lower the monthly payment, you can focus more on lenders that offer long repayment periods.
If a lender offers prequalification, you can try prequalifying to get a better idea of the exact rates and terms a lender will offer your business. As a bonus, prequalification only requires a soft credit check, so it won’t impact your credit score.
6. Submit an application
When you’ve identified the best lender for your business, it’s time to submit final application. Complete the required documents and wait for the lender to make a decision.
When to refinance a business loan
Most commonly, refinancing is used to lower interest rates and reduce monthly payments
Loan rates are based in part on index rates and market forcesbut your business credit and income also come into play. This means deciding when to refinance can be difficult.
It may make sense to refinance if market rates have dropped or your business has improved its earnings or credit rating. If market rates have risen and your business is struggling, it may be difficult to qualify for a good refinance loan.
Business Loan Refinance FAQs
In theory, you can refinance a business loan immediately. If you want to refinance with the same lender, they may not be willing to approve a new loan. And some lenders won’t refinance a loan until you’ve made a certain number of payments. Realistically, things like loan origination fees add up if you try to refinance frequently, so you’ll have to wait a few months to a year at a minimum between each refinance.
Yes, it is possible to refinance a company’s debt with a SBA loan. Keep in mind that SBA loans may involve more paperwork and take longer for approval than other types of loans. The SBA may restrict when you can use an SBA loan to refinance other debts.
Refinancing can have a cost. If your current loan has a prepayment penalty, you will have to pay it. Your new loan may come with an origination fee or have a higher total cost than your previous loan. you must crunch the numbers to determine if the additional costs are worth it.