Typically, you can refinance a business loan just like you would a mortgage or other personal loan. Refinancing is the process of applying for a new small business loan with better rates/terms to pay off the existing debt. If it helps you reduce your payments, it may be a good idea to refinance your business loans. However, sometimes, especially if you’re already struggling to make payments, refinancing can make things worse.

In this article, we’ll explain what you need to know about how and when it’s a good idea to refinance your business loans.

What does it mean to refinance a loan?

Refinancing a business loan is the process of applying for a new loan to pay off an existing one. The goal is to improve cash flow and save money. This can be done if the new loan has more desirable terms, including:

• Lower monthly payments/interest rate
• Less frequent payments
• Longer repayment terms

There are several options for refinancing your business loans, including SBA loans, traditional bank loans, or alternative lenders. However, your ability to refinance your current debt depends on your business lender, the terms of your existing loans, and your business’ qualifications.

Should you refinance your business loan?

While it’s true that refinancing can be an excellent way to manage your business debt, it’s not the best idea for every situation. Here are some situations in which refinancing could help:

• Your qualifications have improved (credit score, time in business, annual revenue, etc)
• Your current loan is expensive (high-interest rates/payments affecting cash flow)
• You can save money (lower interest rate or ability to turn a variable rate into a fixed rate)

Again, there are some situations in which refinancing may not be a good idea including:

• You’re struggling to make current payments (talk to your lender about other options before pursuing refinancing)
• You won’t save money (new fees, such as origination fees/closing costs, early repayment penalties on current loans, etc could add up)

How to refinance your business loan

If you believe that refinancing is a good idea, here is what you should do:

Set your goals

First of all, you need to determine why you want to refinance. Do you want to:

• Lower monthly payments?
• Reduce payment frequency?
• Lower your interest rate?

The answers to these questions will help you determine your purpose for seeking to refinance, which will streamline the process.

Determine what you currently owe

The next step is to understand your current loan:

• Outstanding balance
• How many months are left on the term
• Loan payment schedule/amount
• Current interest rate

You will also want to determine if there are any pre-payment penalties and how those could affect the refinance.

Evaluate your eligibility

Next, you’ll want to evaluate your eligibility criteria to determine the type of loan you qualify for. Most lenders consider:

• Personal and business credit scores
• Time in business
• Annual revenue

Lenders may also consider cash flow, financial accounts, and available collateral.

Research/Compare lenders

When refinancing a business loan, you can go through your current lender, or you can find a new lender. Take time to research and compare the three primary types of lenders:

• Banks: typically offer the lowest rates and best terms- but have strict requirements
• SBA lenders: offer competitive rates/terms, easier to qualify for than traditional bank loans, but still have strict requirements
• Alternative lenders: quick financing and flexible requirements, but also have higher rates than traditional or SBA loans

During your research/comparison, consider qualification requirements, interest rates, repayment terms and schedules, and any additional fees.

Gather documentation and apply

The final step is to apply for a loan. Typically, you’ll need to provide the following:

• Basic personal and business information
• Personal and business bank statements and tax returns
• Financial statements
• Current debt schedule
• Collateral information

If approved, take the time to review the terms and conditions before accepting. Make sure that it meets your goals.

Find the Right Loan

Typically, the best loan is the one with the lowest rates and best terms. However, funding time may also impact your choice. This is a decision that requires some thought- don’t rush into anything. If you need help, contact the experts at KMS Funding for more help.