Refinancing Business Loan can be a great solution for business owners if they:
- Struggling with a high interest rate or high monthly payments on a business loan.
- Thinking of consolidating several business loans into a single monthly payment, to avoid high balloon payments on commercial loans.
However, before you decide to refinance business debt, you must consider these following things:
The benefit of refinancing business debt for your business.
Before you refinance a loan, you should evaluate your current business performance. Has your credit score and business revenues improved since the time you applied for the original loan? Any incremental improvements can make refinancing beneficial for your business.
Also consider about the terms of your existing debt; i.e. the interest rate and remaining term on the current loan. Prior to refinancing, you should consider where you are at in terms of paying off existing debt. If your main reason for refinancing is to lower your monthly payments, better do it when you’re in the tail end of your current loan term. Refinancing to a loan with a longer term will make your monthly payments more manageable.
Refinancing Business Loan Fees
Refinancing business debt is not free, in fact sometimes the fees can be quite costly. Lenders might charge you with various fees such as origination fee, application fee, lender fee, and prepayment penalty if you refinance again before the loan is paid off.
You can try to reduce these fees by going to the lender that issued the original loan. Try to negotiate for lower fees or have them eliminated altogether. In addition, most fees can be either paid upfront or rolled into the loan.
Reason(s) For Refinancing
There are many reasons that lead small business owners to refinance:
Lower Monthly Loan Payments
Refinancing business debt can help you to get a lower-rate loan or longer-term loan. However, to be able to get this you must have good credit (above 600), improved business revenues, how long you’ve been in business, and how much collateral (if any) you have. Requirements vary based on the lender.
Consolidate Multiple Business Loans
Consolidating business debt can not only result in lower monthly payments, but will also result in a single monthly payment, which means no more juggling multiple payment schedules and rates.
Switch Out a Variable Rate for a Fixed Rate
Some business loans, especially bank and SBA loans under $100K, tend to have variable rates. This means they are tied to a market rate. If you’d rather have the guarantee of a fixed rate and a fixed monthly payment, you can try to refinance to a fixed rate loan.
Refinancing business loan can help you replace the existing business debt with a new loan for the same amount. With cash-out refinancing, you trade in the existing business loan for a larger loan. You put the difference back into your business and use it to grow the business.
Find The Best Lender for Refinancing Loan
The best option is to go to the lender that issued the original loan and see if they will refinance your business debt. The original lender is more likely to waive any fees associated with refinancing.
If you don’t have good credit or good business revenues, you can apply for SBA loan, put the proceeds in the business as working capital, and use the resulting business profits to pay off the existing debt.
Impact of Refinancing to Your Credit Score
Refinancing Business Loan could lower your credit score by a few points. Moreover, the new loan is a new credit obligations, which can also hurt your score.