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How to refinance a business loan
You could score a better deal — but only if you know what fees to avoid.
A “set it and forget it” approach might work for some business owners when it comes to loan debt. But if your business is growing quickly, has improved its credit or has collateral to put down for a new loan, you may be ready to refinance.
How does business loan refinancing work?
When you refinance a business loan, you take out a new loan to repay your previous lender. 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.
To get the best deal, your business will need to have improved its revenue, decreased its other debt and have a steady cash flow. You and any business partners you have may also need to meet credit score requirements.
How to refinance a business loan
The exact process will depend on your lender, but in general, you’ll follow these steps:
- Determine if refinancing is the best option. In some cases, you may be financially better off in the long run by sticking with your current loan. Conduct a thorough cost-benefit analysis to decide if refinancing is the right solution for your business.
- Compare your options. Have a clear goal in mind before you start looking for a new loan — including what your ideal rates and terms are. This will help you compare lenders and shop for the best deal.
- Submit an application. 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 need to supply financial statements from the past two years, profit and loss statements, projected revenue and business tax returns.
- Repay your previous loan. If approved, you can use funds from your loan to repay your original lender. Your new lender may submit the money for you, but in many cases, your loan funds will be deposited into your business checking account for you to submit a final payment.
Compare lenders that offer refinancing for business loans
To see your options, select your desired loan amount, annual revenue, time in business and personal credit score range. Then click Show loans.
Is my business eligible for refinancing?
The exact eligibility criteria vary from lender to lender, but you and your business will likely need to meet these basic requirements to get a good deal:
- Annual revenue of at least $100,000
- At least two years in business
- Good to excellent personal credit score of 670 or higher
- Business plan that shows estimated growth
- Copies of your loan statements for the past six months
What questions should I ask before I refinance?
Refinancing may not be the right choice for your business — these questions can help guide you toward your decision.
- Is my business in a good financial position? Your business will need to have improved its revenue and increased its credit score to make applying for a new loan really worthwhile.
- Am I in a good financial position? Your personal credit score and debts will also likely play a role in the terms of your next loan. This is because many lenders require a personal guarantee from owners of the business — so you’ll need to get your finances in order before you apply.
- What is my end goal for refinancing? Lowering your APR is one of the main reasons to refinance, but some businesses may benefit from a longer loan term with lower monthly repayments — even if it means paying more interest.
- Does my current loan meet the needs of my business? If you have a competitive APR, good terms and a strong working relationship with your current lender, it may not be worth refinancing.
- What’s 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. Plus you may be on the hook for a prepayment penalty fee.
Should I consolidate my debt instead?
If your business has multiple loans, especially loans with high rates or short terms, business debt consolidation may be a better choice. Unlike refinancing, consolidation allows you to combine multiple loans into one monthly repayment. While you’ll still end up with a similar end result, consolidation is best for multiple high-interest debts.
What are the benefits to refinancing my business debt?
Refinancing generally brings with it a few benefits, including:
- Lower rates. Refinancing can help you find a better APR, which in turn lowers 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.
- Borrow more. Some lenders will allow you to borrow a larger loan and use the remainder for other business expenses. This can help increase your working capital — but keep in mind that you may not lower your repayment if you borrow more than you owe.
- 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.
- Release previous collateral. If you offered a business asset as security for a loan, you may be able to refinance to an unsecured loan and release that collateral. And if you used a personal asset as collateral, you could refinance to a secured loan and use a business asset instead.
When is refinancing a business loan a bad 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.
- Low business credit score. Businesses have their own credit outside of the owners’ personal scores. If your business still has a low score, you can’t access the best rates and features of a loan.
- Increased cost. 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.
- Already have a good lender. If your business is a long-term customer of a particular lender, it may have an in-depth understanding of your business’s history and financing needs. Switching to a new lender could damage this relationship.
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.
- Origination fees. Many lenders charge an origination fees between 1% to 5% of the total loan amount.
- Prepayment fees. Check the terms of your lenders. Some lenders 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 hundreds or even thousands of dollars for an appraisal.
- Closing costs. These costs cover loan packaging or a business valuation.
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.
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