How to refinance a business loan in 5 steps – Forbes Advisor
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There are many reasons you might want to refinance a business loan. For example, if interest rates have fallen since you took out your original loan, you are in a better position to benefit from lower rates, or if you want to reduce your monthly payments, refinancing your existing commercial debt could help you optimize your cash flow. .
However, getting a small business loan is a process, and that includes refinancing as well. Whether you want to refinance with the same lender or get an external loan option, you’ll want to put your business in the best possible position to qualify. Here’s how.
1. Determine how much you owe and other key details
Before you can get a new business loan to pay off existing debt, you need to gather some important information. Details you should look for include:
- Your unpaid loan balance
- The number of remaining payments you owe
- The expected date to make the final payment on your loan
- Your current interest rate (and whether it’s fixed or variable)
Your monthly loan statement may contain the answers you need. However, you can also call your current lender to request the information.
Collecting these details in advance will prepare you when looking for new loan options. Refinancing usually only makes sense if you can save money on interest or lower your monthly payments by extending the term of your loan when you need to free up cash.
2. Check your eligibility
It is wise to understand if you are eligible for financing before applying for a new loan. Some lenders will list certain business loan requirements that you must meet to be eligible for financing in areas such as:
- Professional and personal credit scores
- Time in business
- Debt-to-income ratio (DTI)
- Debt Service Coverage Ratio (DSCR)
- Company turnover and annual profit
Along 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 for better loan terms, bad credit could be a barrier.
Be on the lookout for any other red flags that could also cause problems when applying for a new business loan. If you discover any potential problems, see if you can fix or at least improve them before you apply for a loan refinance.
3. Gather the required documents
When you apply to refinance your business loan, the lender will review certain documents to determine if you qualify. This helps the lender understand your level of credit risk and eliminate any fraudulent claims. Financial reports can also establish how much your business can afford to repay and how much the lender can comfortably lend.
A lender will likely ask for some or all of the following:
- Bank statements
- Personal and professional tax declarations
- Business licenses and permits
- Employee Identification Number (EIN)
- Proof of warranty
- Balance sheet
- Copy of your commercial lease
- Disclosure of other debts
- Maturity of accounts payable and receivable
- Ownership and affiliations
- Contracts and legal agreements
- Your driver’s license
- Business insurance plans
- Payroll records
- Constitutive acts
- Business plan
4. Find and compare lenders
Finding the right lender is essential when trying to get a better loan deal with refinance. When comparing different lenders, there are several factors you should consider, including:
- Interest rate
- Additional charges
- Personal guarantee
- Loan amounts available
- Repayment Terms
- Lender’s reputation
Keep in mind that the best lender might be the one you are already working with. Some lenders are prepared to refinance the loans of their existing customers. Unless you like the customer service experience offered by your current lender, it doesn’t hurt to ask your lender if refinancing your loan is an option.
You can also search for lenders who will let you see if you prequalify for financing. When you prequalify, a lender usually performs a soft credit check, which has no impact on your credit scores, and shows you what you are entitled to when you submit a formal application.
5. Submit your application
Once you’ve found a business loan that’s right for you, it’s time to submit your application online or in person. Make sure you provide the lender with all the required documents immediately so that you don’t slow down the process.
Some lenders may notify you immediately if you are eligible for refinancing your business loan. Others may have a longer application process, which may take a few hours or days to see your results. With US Small Business Administration (SBA) loans – government-backed loan programs that often offer attractive interest rates – it can take several months to find out if you qualify after you submit your application.
Types of business loans you can refinance
Below are some of the business loans that you may be able to refinance with a new loan.
- Term loans to businesses. Term loans are a traditional form of financing that is repaid over a set period of time, typically up to 10 years. These loans can finance most major business related purchases.
- Business lines of credit. A line of credit is a fixed amount of money that a business owner can use as needed, compared to a lump sum payment upon approval.
- Working capital loans. Working capital loans help businesses pay for day-to-day operations, such as payroll, debt repayment, inventory replenishment, and rent maintenance.
- Short term business loans. A short-term business loan allows businesses to access cash to cover items such as short-term payroll needs, emergency expenses, or other unforeseen cash shortages.
- Equipment loans. Business owners looking to finance business-related equipment can turn to equipment loans for the necessary funds.
- Business real estate loans (CRE). CRE loans help businesses buy commercial property, such as shopping malls, shopping malls, office buildings, and hotels.
- Business credit cards. Although not a traditional loan, business credit cards are one of the most commonly used financing methods. You can basically refinance business credit card debt with balance transfer credit cards, which have additional fees.
Refinance an SBA loan
SBA loans can be more difficult to obtain compared to other types of business refinancing options. But the SBA 504 loan program might still be worth considering. Although the program can have its challenges, a new SBA loan has the potential to be an affordable refinancing solution for some businesses.
To be eligible for an SBA 504 loan, your business must have been in existence for at least two years. The debt you are looking to refinance also cannot be less than two years old. You will need to prove that the original loan was for a purpose approved by SBA 504. In other words, your business had to use these funds to purchase qualifying capital property such as land, equipment, or real estate occupied by its business. owner.
It’s also essential to show that your business has paid off its credit obligations on time for at least the past 12 months. And you can’t use the 504 program to refinance existing government guaranteed loans.
Tips for refinancing your business 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 that a new refinance can benefit your business.
1. Crunch the numbers
It is important to gather several refinancing offers before submitting your new loan application. But you need to compare the right loan details to make sure you find the best deal for your business.
Consider using a business loan calculator to compare several refinance loan offers.
2. Look for penalties
Your existing loan may have a prepayment penalty. If so, refinancing may 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.
3. Watch out for debt creep
Taking a more affordable loan to refinance existing debt can save you money and help you pay off debt faster. Still, you might be tempted to take on more 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 accumulate new balances on those same credit cards, you might have a hard time meeting all of your debt payments in the future. In some situations, a heavily used business credit card can hurt your personal credit as well.
Pros and Cons of Refinancing a Business Loan
Consider the following advantages and disadvantages to determine if refinancing your business loan is a wise choice.
- To save money: You may be able to lower your monthly payments and pay less interest when you refinance.
- Improve cash flow: Finding a new loan that lowers your monthly payment amount could reduce the stress on your business’ cash flow.
- Building business credit: If your new lender reports to the business credit bureaus, refinancing can give you the opportunity to establish a good payment history on your business credit reports.
- Potential barriers to qualification: If you have bad credit or other obstacles to your qualification, you might not be eligible for a refinance loan. Even though you can find a lender to approve you, the new loan offer may not be competitive enough to save you money.
- Possible sanctions: If your original loan terms include prepayment penalties, those fees may offset your potential savings.
- Higher overall cost: You might be motivated to refinance your business loan to set up more affordable monthly payments. Yet if you extend the term of your loan to meet this goal, you risk paying more interest in the long run.