How to Refinance a Small Business Loan

Last Updated April 3, 2023

Most business owners don’t recognize that their current loan may no longer be the best for their enterprise. And as the Covid-19 pandemic lingers, many small businesses are looking for help to remain operational.

After paying your business loan for some time, there are options to reduce your debt even further. You may extend repayment terms or refinance your loan.

Refinancing a business loan entails applying for a new loan. It could be with the original lender or a new one. The new loan covers the previous debt, leaving you with a loan with better interest rates. Ultimately, loan refinancing enhances your business’ growth.

But are the pros of refinancing greater than the potential costs of the refinance? And how do you go about a refinance?

Typically, a refinance is a straightforward process, but you need some smart tips before stepping into this world.

Read this in-depth guide that has all you ought to know about a refi.

Is it Possible to Refinance a Small Business Loan?

Yes, business loans are often refinanced just like other loans. Many lenders offer loan refinancing at a lower rate. Refinancing a loan may be an ideal saver if the business is deep in loan or burdened with an unaffordable loan.

If the business generates more revenue, you have a better credit score or a long business history, and you have good reasons to consider refinancing. These factors may make you suitable for a refinance with good terms to help you save some cash.

The various refinance options include:

• Bank Loans – Traditional banks, though they may have stringent requirements, may refinance your business loan.
• SBA loans – Business loans that were SBA eligible under the SBA 7(a) loan program qualify for refinancing.
• Non-bank Financial Institutions – Other market lenders, provide refinancing or alternative lending, for businesses that do not meet the strict requirements of traditional banks.

Now that you know that you can acquire a small business loan refinance, how does it work?

How Business Loan Refinancing Works

A small business loan refinancing process does not differ significantly from a student or mortgage loan refinance. Typically, the procedure involves sourcing for a new loan to pay off the initial debt. You are now supposed to make installments to pay the new loan.

When refinancing via traditional banks, interest rates vary from 5% to 10% on a term of between one and ten years. For SBA refi, interest rates range from 4.5% to 6.5% and between seven and 25 years. However, other lenders have higher rates – perhaps 9% to 50% and shorter terms – between four months and five years.

Important Refi Steps

A refinance business loan refinance may have additional steps, unlike a mortgage or personal and other loan types. It often necessitates extra documentation and specific qualification factors. However, these steps classify as below:

Determine Your Debt

Analyze your current principal and interest debt total to know precisely how much you require to borrow and clear your debt. It is also vital to note your current loan term.

A refinance loan should offer better interest rates and repayment terms than your current loan.

Collect all Important Documents and Information

The types of documents required for refinancing vary depending on the lending institution. However, all would require evidence that your business can afford to repay a new loan. Some of the standard documents required for a refinance include:

• Credit history
• Balance sheet
• Accounts payable
• Business plan
• Tax returns
• Cash flow history and predictions
• Collateral

When collateral/security is involved, the loan refinancer may need a security interest in receivables besides inventory and equipment.

Research and Compare Lenders

If you are unhappy with your current terms or lender, you could find a new financial institution. For the best refinancing results, ensure you compare fees, interest rates, repayment terms, and periods from different vendors.

Apply for a Refinance

After choosing the loan you find best, you can start the application process.

More on How Refi Works

The terms and rates offered for a refi depend on the original loan’s initial purpose. For instance, if an asset that may be past its economic lifespan has the original loan pinned to it, refinance terms may be more hostile.

There are costs incurred while refinancing a loan. These include closing costs, usually 3% to 6% of the total loan amount. Other costs associated with refinancing include an origination fee, SBA guarantee fee, payment penalty for clearing debt before the term ends, and a late fee for overdue payments.

If the costs outweigh the revenue, it would be best if you avoided that refinance option. A business loan calculator would help you determine this. However, you can consider consolidation if you have multiple business loans.

Types of Business Loans You Can Refinance

Not all business loans are the same. The nature of a loan serves for determining eligibility for refinancing. Yet, refinance does not apply to all business loans.

Some of the loans that qualify for a refinance include:

• Term loans – are the most prevalent types of business loans. They are a lump sum of cash that borrowers repay over a fixed term. It has predetermined monthly payments with added interest on the principal balance.
• Microloans – Microloans are small debts of up to $50,000 or less in funding. Nonprofit organizations or the government offer them. However, collateral is a must for such loans.
• Working capital loans – these are loans that fund your business’ daily costs of operation, like invoice factoring or accounts receivable financing
• SBA loans – The Small Business Administration assurances
• Commercial real estate loans – they help fund new or existing property such as offices, retail spaces, or a warehouse. They act like term loans and can allow you to expand to a new location, buy new commercial property or refinance your current loan.
• Equipment loans – these are loans obtained for the purchase of equipment for your business.

Pros and Cons of Refinancing your Small Loan

Business owners enjoy a variety of benefits for refinancing a loan. However, there are a few downsides too.

Pros

Here’s why refinancing a loan may make financial sense for your business.

Lower Interest Rate

If your current loan offers a very high interest rate, you should consider refinancing. There are better loan services with lower rates, and refinancing would help you achieve a better deal.

Improved Cash Flow

In the long run, lower interest rates save you a lot of money by reducing your loan repayment. With more cash flow, you have more working capital to generate more revenue or invest in more equipment, inventory, locations, etc.

It’s Easier to Manage Debt

Suppose you have multiple debts and consolidate them into one loan. In that case, you will only be concerned about making payments for a single loan rather than making multiple repayments for several debts.

Enhanced Flexibility

Startups often do not get the best deals. However, if your business survived its startup years, you have better leverage, especially in matters of financing. The company is more stable now. Hence you may have more financing options.

Reducing the Total Loan Repayment

If you find a better interest rate, you effectively reduce the loan amount.

Cons

Reduces Credit Score

Refinancing a debt may harm your credit score primarily because you are repaying debt with another. If your business already has a poor credit score, refinancing may not be worth the risk.

Not Everyone Meets Qualifications

There are other factors other than rates that you should consider—for instance, your current credit score. Refinancing is not the only option to clear a debt.

Prepayment Penalties

Paying off your entire loan could cause a prepayment penalty charge. Repaying a business loan within the first three years attracts a penalty. it is usually 1% to 5% of the loan. Some lenders, however, do not charge a prepayment penalty.

How to Qualify for Business Loans Refinancing

Here’s a checklist to check for your eligibility for refinancing. Looking at these features will increase your chances of qualifying for a refinance.

Ensure You Meet the Minimum Annual Revenue Provisions

You can’t simply qualify for refi by waving a magic wand. Ensure your business revenue is sustainable. As mentioned earlier, the credit score is also essential.

Related: Small Business Revenue Statistics

Get a Cash Flow Boost

High monthly expenditures reduce cash flow. Try to cut on unnecessary spending, which will generally increase your appeal to refinancers.

Find a Collateral

Most refinancers require security or assurance that you will repay your loan. It helps to have a property or asset for security.

Other factors to consider include:

• Paying your outstanding tax liens
• Ensure your business has been operational for long enough
• Solve any bankruptcy filing first

Conclusion

Whether refinance is viable or not depends on your business. If you are not sure about how it may turn out, consult an expert for guidance.

As a rule of thumb, consider a refinance if it would save you a substantial amount of money through lower interest rates. However, a refinance may not be worthwhile if you get a slightly lower monthly payment or interest rate.