Everything you need to know about refinancing your business loan to get a better deal.
Many business owners take a “set and forget” approach to business financing. They borrow a loan then continue making regular payments until everything’s paid off. This approach might work for some, but businesses grow and change. You might qualify for lower rates or better terms, and save your business money.
If your business is growing quickly, has improved its credit or has collateral to put down for the loan, you may be ready to refinance.
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How does business loan refinancing work?
Business loan refinancing may seem a little complicated at first, but we’ll help you through the process. You’ll need to apply for a new loan — preferably one with a lower interest rate or longer term — and use those funds to pay off a previous loan. If your business credit score has increased, you have a number of small loans you’d like to consolidate or need to extend your payment period, refinancing is generally the way to go.
Beyond the change of lenders, refinancing can take many forms. For most businesses, the goal is to save money by lowering interest rates, though some prefer to lower monthly payments by choosing a loan with a longer term.
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What questions should I ask before I refinance?
While refinancing a business loan could potentially benefit your business, you should never take the decision to refinance lightly. Just like any loan, weigh pros and cons of the new loan package against what you already have. Some may lower your monthly payments but come at the cost of extending your loan term and interest, while others may lower your interest rate but require expensive collateral. Experts say that refinancing is worth it if you see your APR go down by about 5% or extend your repayment term by 12 months or more.
Try to answer these four questions before you tackle a new loan arrangement.
- What’s my goal of refinancing?
Do you want to keep day-to-day costs down by extending your term, or would you rather have this debt paid off so you can take out a new loan? There are lots of reasons a business would want to refinance a loan, so make sure you know yours. - Does my current loan meet the needs of my business?
Do your loans give you easy and affordable access to the funds you need? List your existing debts and the total balance to see if you should refinance some or all of your loans. - How could refinancing benefit my business?
Refinancing your loan can get you better interest rates, reduce your repayments or access equity in your business. Find out how refinancing can make your business more financially secure. - What is the cost of refinancing?
Refinancing your loans is meant to save you money, however there are fees involved. You can expect to pay origination fees from 1% to 5% of the loan amount, and possibly see bank, attorney, title and appraiser fees. And if you decide to change lenders, you may pay a prepayment penalty fee.
Is my business eligible for refinancing?
The eligibility criteria for business loans vary from one lender to the next and can depend on the loan type you’re looking for, but generally you’re business will be required to:
- Have a good credit history.
- Have been in business for at least two years.
- Provide proof of business income, such as bank statements, tax returns and projected cash flow statements.
- Provide a business plan that shows estimated growth.
- Provide copies of your loan statements for the past six months.
Other criteria, such as providing collateral for the loan, may also be required depending on your circumstances. Thoroughly research a loan’s eligibility criteria and put together a comprehensive application. This helps your chance of approval and could get you a good deal.
How can refinancing benefit my business?
Refinancing a business loan can be helpful to your business. If you find the right lender you could see benefits like:
- A lower rate. Refinancing can help you find a better APR, lowering your monthly payments and total cost of your loan. This could open your cash flow to invest back into your business for things like new equipment.
- You can switch to a fixed rate. A loan with a variable interest rate can make budgeting for payments difficult. With a fixed-rate loan, your interest rates are locked in and won’t increase for the life of your loan. This helps create a predictable budget.
- You want to increase cash flow. By refinancing to a better deal, you can lower your loan repayments and increase the amount of cash available to help you manage your business day to day.
- You want to manage your debt. By consolidating multiple debts into one loan, you only have to worry about paying down a single loan rather than making repayments towards several different loans.
- You want to access the equity in your business. Refinancing can allow you to access the equity you have built up in your business to fund future spending or upgrades.
- You want to release previous collateral. If you offered a personal asset like your home or property as security for a loan, you may be able to refinance and release that collateral. With a refinance, your business may be able to offer its own collateral to replace your personal assets.
Can refinancing a business loan be a bad idea?
Refinancing your business loan may not always be the best idea. There are circumstances that make it better to stick with the loan you already have. Your choice to refinance or keep your current loan depends on the financial circumstances of your business and the risks and benefits of adjusting your loan arrangements.
- Your business credit is low. Businesses have their own credit outside of your personal score. If your business still has a low score, you can’t access the best rates and features of a loan. In this situation, refinacing may not be the best option.
- It will cost too much. Add up the total cost of refinancing, including the fees that come with paying off your current loan. If the cost of refinancing outweighs the potential benefits, refinancing is likely not the right choice for your business.
- You haven’t been officially approved. Don’t commit to changing loans or lenders until you’ve been approved. Evaluating the terms of a new loan takes time, so wait for official approval.
- You risk losing the relationship with your current bank. If your business is a long-term customer of a particular bank, it may have an in-depth understanding of your business’s history and financing needs. Switching to a new lender could damage this relationship.
The business loan refinancing process in 6 steps
Refinancing your loan could differ depending on your business’s needs and loan terms you’re considering, but most refinancing follows these steps:
- Decide whether you need to refinance. In some cases, you may be financially better off in the long run by sticking with your current loan. Conduct a thorough cost and benefit analysis to decide whether business loan refinancing is the right solution. Have a clear goal in mind before you start looking for a new loan.
- Compare your options. Shop around and compare loans from a variety of lenders. A financial broker who specializes in business loans can help you access many lenders that can help you refinance your loan.
- Choose a lender and loan. Once you’ve found the right lender and loan, make your final decision.
- Apply for the loan. Prepare all the necessary paperwork requested by the lender and apply for the loan. Detailed documentation is usually required before you can refinance, and you’ll usually need to supply financial statements from the past two years, profit and loss statements, projected financials and business tax returns.
- Get approval. Once you have all your documents in order, your application will be assessed by the bank. If you have collateral for your loan, the lender will likely want to have it evaluated.
- Settlement. The final step is to sign the new loan contract and pay off your previous loans. You can expect to start making your new loan repayments after a month.
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How much does it cost to refinance a business loan?
Refinancing is meant to save you money, but you can expect to pay some fees. Fees can vary, but lenders should offer the cost of these fees upfront before you apply. Most refinancing fees cost between 1% to 5% of the total loan amount, so evaluate the potential cost to the savings your looking for.
Other fees you might encounter include:
- Origination fees. Most lenders charge an origination fees between 1% to 5% of the total loan.
- Prepayment fees. Check the terms of your lenders. Some banks charge a fee for early repayment — if you break from their loan, they lose money from your interest.
- Underwriting fees. Underwriters review your application and the determine the terms of your loan.
- Legal fees. Depending on the size of your business, you may need an attorney or financial advisor to help you determine the best deal for your business.
- Appraisal fees. Offering collateral can lower the total cost of your loan, but you can pay thousands of dollars for an appraisal.
- Closing costs. These costs cover loan packaging or a business valuation.
Bottom line
Refinancing a business loan can help your business succeed and grow, but you’ll need to weigh all your financing options as you make your decision. Not every loan needs to be refinanced, and you should be prepared to pay off the high fees of any previous loans before taking out a new one.
Frequently asked questions
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