When to refinance a business loan

Many business owners borrow money to help pay start-up costs, finance an expansion or cover unexpected shortfalls. The downside is that borrowing money means paying it back, which can be a drag on your business finances.

Refinancing a business loan involves taking out a new loan to pay off an old one. It allows you to adjust details such as interest rate, monthly payment, and loan repayment term. However, deciding when to refinance a loan can be tricky.

Why refinance a business loan

Refinance a business loan means taking out a new loan and using that money to pay off the balance of an older loan. You can do this with your current lender or with a new one.

Refinancing gives you the option to change the details of your loan, such as the interest rate, monthly payment, and repayment term.

Two of the main reasons to refinance a business loan are to reduce its overall cost or monthly payment.

If you can refinance a business loan with a lower rate interest rate, this will usually help you save money on the loan in the long run. Lower rates mean less interest will accrue over the life of the loan.

If your goal is to lower your monthly payment, there are several avenues you can take.

Reducing loan interest is a strategy, but it’s not always possible, depending on your creditworthiness and the current state of the loan market. Another option is to extend the term of the loan. This allows you to spread your repayment over a longer period. However, this increases the long-term cost of the loan by allowing more time for interest to accrue.

Another reason to refinance is to change the type of business loan you have. For example, refinancing could allow you to convert a credit line variable interest rate into a fixed rate term loan.

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When to refinance your business loan

In general, you should consider refinancing when it can help you save money or provide another benefit to your business, such as reducing your monthly loan payments to improve your cash flow.

Market rates have fallen

Interest rates on loans are influenced by a wide variety of factors, such as your business’s credit rating and financial condition, but there is one major factor over which you have no control.

Rates for all types of loans go up and down based on market forces. One of the main influencers in the rates market is the Federal Reserve federal funds rate. The Fed adjusts this rate, raising it to fight inflation and lowering it when the economy slows.

When the federal funds rate is high, loans tend to become more expensive. When it is low, loans tend to be cheaper. This is particularly true for interest rates indexed to preferential rate and the Overnight Guaranteed Funding Rate, which moves in tandem with Fed rate adjustments. Many SBA Loan Ratesfor example, are indexed to prime.

If you got your loan when market rates were high and rates have since fallen, refinancing could help you save money.

Your personal or business credit scores have increased

Most lenders weigh heavily on credit scores and history when determining loan interest rates. Your credit score helps lenders decide if you and your business can be counted on to repay loans on time. A lower score translates to higher rates as lenders try to offset the risk of lending to you.

For business loans, both personal and business credit score can influence rates (although small business lenders more often consider your personal score). If you have increased these scores since obtaining the loan, you may be able to refinance at a lower rate.

You have improved the revenue or profitability of your business

Lenders tend to care about one thing only: if you will repay the money you borrow. Lenders compensate for risk by raising rates, so businesses that appear risky to lenders tend to pay higher interest rates.

If you got your loan when your business wasn’t making a lot of money, your business probably looked like a big risk. If his financial situation has improved, refinancing when you seem less risky can help you reduce your loan rate.

You got your original loan when your business was young

Another major risk factor in the eyes of lenders is the age of a business. New businesses, especially those that are only a few months or a year old, pose huge risks. The owners probably have limited experience and the company is not used to making timely payments.

All this translates into more expensive loans.

If you got a term loan when your business was young, a few years of success can show that your business is not a risk and lower your borrowing costs.

Banks usually have lower rates and higher rates business time requirements than online lenders, so if you’ve recently passed the two-year threshold, try to consider refinancing with a bank.

When to delay refinancing a business loan

Refinancing is a good idea in many situations, but there are times when it will cost you money and not bring much benefit.

Market rates have risen

If market rates have gone up since you got your loan, you may not be able to get a new loan at a lower rate, even if your credit or business financial condition has improved.

This means that refinancing will simply make your loan more expensive.

Lending rates have increased throughout 2022 as The Fed has approved significant rate hikes six times in a row. If you got your loan within the last two years, now may not be the best time to refinance.

Your personal or business credit ratings have plummeted

If your business credit or personal credit scores have dropped since you got your loan, you may have trouble qualifying for similar interest rates. If the decrease in credit score is significant, you may not be able to qualify at all.

Your business revenue or profitability stagnates or declines

If your business becomes less profitable or loses revenue, that’s a big red flag for lenders. You will find it difficult to refinance yourself at a good interest rate. Some lenders may require you to post collateral or place a general lien on your business assets. Or they may just refuse to approve your request.

Should I combine my credits?

If you have several loans for your businessWeigh the pros and cons of consolidating your loans instead of refinancing them individually.

Consolidating means getting a new loan and using the money to pay off several existing loans. You trade multiple loans and their corresponding monthly payments for a single loan and a more manageable monthly payment.

When consolidating, you need to consider many of the same factors as refinancing, such as whether you can get a new loan with a lower interest rate.

The main advantage is the simplicity of applying for only one new loan and managing only one loan in the future.

But remember that your existing loans probably all have different terms. If you consolidate, it could make some loans longer and others shorter. This makes it harder to calculate whether you’re saving money overall. You can use a business loan calculator to compare the results.

In general, consolidation is good if you are looking for simplicity and to lower your monthly payments. Refinancing each loan individually can help you save more money overall by allowing you to maintain the current terms of each loan while lowering their interest rates.

The bottom line

Refinancing your business loans can help you save money. Look to refinance when you can lower the interest rate on your debt or save money.

Refinancing to lower your monthly payment and improve your cash flow can be attractive, but increases the overall cost of your debt.If you’ve scoured the numbers and refinancing looks promising, check out Bankrate’s guide to how to refinance a business loan.