How To Refinance A Business Loan In 5 Steps – Forbes
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Published: Dec 24, 2021, 9:00am
There are numerous reasons why you might want to refinance a business loan. For instance, if interest rates have dropped since you took out your original loan, you’re in a better position to qualify for lower rates or if you want to lower your monthly payments, refinancing your existing business debt could help you optimize your cash flow.
However, getting a small business loan is a process, and that includes refinancing, too. Whether you want to refinance with the same lender or secure an outside loan option, you’ll want to put your business in the best position possible to qualify. Here’s how.
Before you can get a new business loan to pay off existing debt, you need to gather some important information. The details you should look for include:
Your monthly loan statement may contain the answers you need. However, you can also call your current lender to request the information.
Gathering these details upfront will prepare you as you shop around for new loan options. Refinancing typically only makes sense if you can either save money on interest or reduce your monthly payments by extending your loan term when you need to free up cash flow.
It’s wise to understand whether you’re eligible for financing before you apply for a new loan. Some lenders will list certain business loan requirements that you need to satisfy in order to qualify for financing in areas such as:
With credit requirements, you may want to review your business credit and personal credit details before you start filling out new loan applications. It’s not impossible to get a business loan with bad credit, but if your goal is to refinance to secure better loan terms, bad credit could be an obstacle.
Be on the lookout for any other red flags that might cause problems on a new business loan application as well. If you discover any potential issues, see if you can resolve or at least improve them before seeking a loan refinance.
When you apply to refinance your business loan, the lender will review certain documents to determine whether you qualify. This helps the lender understand your level of credit risk and weed out any fraudulent applications. Financial reports can also establish how much your business can afford to repay, and how much the lender may be comfortable lending.
A lender will likely ask for some or all of these items:
Finding the right lender is critical when you’re trying to secure better loan terms with a refinance. As you’re comparing different lenders, there are several factors you should consider, including:
Keep in mind that the best lender might be the one you’re working with already. Some lenders are willing to refinance loans for their existing customers. Unless you dislike the customer service experience your current lender offers, it doesn’t hurt to ask your lender if refinancing your loan is an option.
You may also want to look for lenders that will allow you to see if you prequalify for financing. When you prequalify, a lender typically runs a soft credit check, which has no impact on your credit scores, and shows you what you may qualify for when you submit a formal application.
Once you find a business loan you believe to be a good fit, it’s time to submit your application online or in person. Be sure to provide any required documents to the lender right away so you don’t slow down the process.
Some lenders may let you know immediately if you qualify to refinance your business loan. Others may have a lengthier application process, which may take a few hours or days to find out your results. With U.S Small Business Administration (SBA) loans—government-backed loan programs that often feature attractive interest rates—it can take several months to find out if you qualify after you submit your application.
Below are some of the business loans you may be able to refinance with a new loan.
SBA loans can be more difficult to qualify for when compared with other types of business refinancing options. But the SBA 504 loan program might be worth considering nonetheless. Even though the program may have its challenges, a new SBA loan has the potential to be an affordable refinancing solution for some businesses.
To qualify for an SBA 504 loan, your business needs to have existed for at least two years. The debt you’re looking to refinance also cannot be less than two years old. You’ll need to prove that the original loan was for an SBA 504-approved purpose. In other words, your business had to use those funds to purchase an eligible fixed asset like land, equipment or owner-occupied real estate.
It’s also critical to show that your business has paid its credit obligations on time for at least the last 12 months. And you can’t use the 504 program to refinance existing government-guaranteed loans.
When you approach the process the right way, refinancing business loans can be a wise financial decision. The following tips should help you make sure a new refinance can benefit your business.
It’s important to gather multiple refinance offers before you submit your new loan application. But you need to compare the right loan details to make sure you find the best deal for your company.
Consider using a business loan calculator to compare multiple refinance loan offers.
Your existing loan might feature a prepayment penalty. If this is the case, refinancing might not be beneficial. Any potential interest savings could be offset by the cost of your prepayment penalty. Be sure to factor this potential cost into your savings calculations if this situation applies to you.
Taking out a more affordable loan to refinance existing debt can save you money and help you pay off debt faster. Yet you might be tempted to run up more business debt if you’re not careful.
For example, if you take out a low-rate business loan to pay off your business credit cards, you’ll unlock that previously unavailable credit limit again. But if you run up new balances on those same credit cards, you might have trouble keeping up with all of your debt payments in the future. In some situations, a highly utilized business credit card might hurt your personal credit too.
Consider the following benefits and drawbacks to determine whether refinancing your business loan is a wise choice.
Michelle Lambright Black, Founder of CreditWriter.com and HerCreditMatters.com, is a leading credit expert and personal finance writer with nearly two decades of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, and the intersection of credit and financing. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).
Jordan Tarver is the assistant editor for loans at Forbes Advisor. Before joining Forbes Advisor, Jordan was an editor and writer for multiple finance sites, focusing on loans, credit cards and bank accounts. His goal is to create actionable content that enables people to make sound personal financial decisions. When he is not working on personal finance content, Jordan is a self-help author and world traveler who helps people experience the world and discover themselves.
