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Business Loan Refinancing: What You Need to Know

By on March 24, 2022 5 min read

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Business Loan Refinancing: What You Need to Know

There can be many reasons you may consider business loan refinancing. You may want to decrease your monthly payments to free up current cash flow. Interest rates may have lowered since you initially took out the loan. Refinancing a loan can help reduce your monthly payments. Depending on how your new loan is structured, it may also decrease the overall amount you have to pay back. 

However, just like getting your initial loan is a process, refinancing also requires several steps, and you’ll need to put your company in an excellent position to qualify.

Business Loan Refinancing: What You Need to Know

There can be many reasons you may consider business loan refinancing. You may want to decrease your monthly payments to free up current cash flow. Interest rates may have lowered since you initially took out the loan. Refinancing a loan can help reduce your monthly payments. Depending on how your new loan is structured, it may also decrease the overall amount you have to pay back. 

However, just like getting your initial loan is a process, refinancing also requires several steps, and you’ll need to put your company in an excellent position to qualify.

FURTHER READING: A Business Owner's Guide to Business Loans

What Does It Mean To Refinance Your Business Loan?

Refinancing your business loans involves applying for a completely new loan. You can apply with either your original lender or a brand-new one. 

If you get accepted for refinancing, you get a loan that allows you to pay off your existing debt. In essence, refinancing business loans means getting a new loan to pay off an original loan. 

The new loan will potentially offer:

  • Lower monthly payments
  • Less frequent payments
  • A lower annual percentage rate (APR)

As you can see, business loan refinancing can be highly appealing if your business is struggling with cash flow or needs capital to grow. 

The Difference Between Consolidating and Refinancing Business Debt

As you’re looking to modify the structure of your business debt, there are a few options available. The two primary ways of restructuring debt are debt consolidation and refinancing.

Debt Consolidation

Debt consolidation involves combining multiple loans into a single loan. This process involves taking out a new loan to pay off two or more existing loans. 

Refinancing Business Debt

Alternatively, refinancing your business debt simply means modifying the finance terms on a single debt obligation. 

Debt Consolidation vs. Refinancing

The main difference between debt consolidation and refinancing is the number of loans you are restructuring. You can’t consolidate if you don’t have more than one loan. 

When you refinance a loan, the main goal is to gain new finance terms. These typically include any or all of the following: 

  • Lower interest rates
  • Longer payment schedules
  • Reduced debt payments

In contrast, the primary advantage of debt consolidation is that it simplifies your debt payments and makes them easier to manage. It may also come with some of the same benefits (lower interest rates, longer payment schedules, reduced payments), but those are not always the primary goal of debt consolidation.

In terms of what is better, debt refinancing or consolidation – it depends on your goals. Debt consolidation makes debt payments more manageable, while refinancing allows you to pay off a previous loan using a new loan with better terms. If you don’t have multiple debts to consolidate, debt consolidation is not an option. If you do, refinancing may help make them more manageable but may not reduce your overall repayment amount. It’s important to think through your options and decide what is right for your business.

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Types of Business Loans You Can Refinance

Each business loan is unique, and you may be wondering whether your loan qualifies for refinancing. That said, there are very few types of business loans that you cannot refinance.

The types of business loans you may be able to refinance include:

Loan terms, qualifications, and rates, will vary by each lender. The best refinancing option depends on what you need the money for and when you need it. Mainvest offers alternative business loan refinancing options for you and your business.

Pros and Cons/Benefits of Refinancing Your Business Loans

Before taking out a new loan, it’s essential to know all the benefits and disadvantages of business loan refinancing.

Pros:

Some of the upsides of refinancing include:

Better Cash Flow

Many businesses struggle with cash flow issues, and refinancing allows them to free up additional funds. Refinancing can lower your loan payments, providing extra cash to invest in equipment, payroll, inventory, or other aspects of your business.

Reduced Cost of Financing

By securing a new loan with a lower interest rate and better terms, you can save your business money in the long run. Business loan refinancing also helps you pay off the loan faster.

Increased Funding Amount

If refinancing a business loan positively impacts your cash flow, you could be approved for another, larger loan. You’ll have a better debt-service coverage ratio, which determines if you have enough cash to cover your debt. 

Cons:

Refinancing has its downsides, including:

Credit Score Penalties

Before approving the loan, your refinancing lender needs to conduct a hard credit inquiry. Hard credit inquiries do affect your credit score, but not by much. However, you will still have a short-term negative impact on your credit score. If you already have a low credit score, refinancing might not be a great option.

Prepayment Penalties

It’s vital to ensure your current lender doesn’t charge a prepayment penalty. Prepayment penalties charge you for paying off your loan early. These penalties are built into your original loan agreement, and the penalty may diminish the savings you incur from the business loan refinancing.

Collateral Requirements

A lender may require you to put up collateral to secure the new loan. Business or personal assets may be used as collateral, and the lender could seize the assets if you default on the new loan. 

Interest Rate Environment

Business loans usually have interest rates closely tied to the prime rate. If you took out your original loan when rates were low, refinancing after rates have increased might not be worthwhile.

How To Refinance Your Business Debt

There are a few key steps you need to complete so that your refinancing goes smoothly.

Determine How Much You Owe

Calculate your current loan balance and interest rate to see how much you’ll have to borrow.

Gather and Submit Application Documents

Prepare the following information:

  • Business plan
  • Balance sheet
  • Credit history
  • Cash flow and projections
  • Accounts payable
  • Collateral

You will need this information to apply. 

Research and Compare Lenders

It’s vital to compare loan terms, rates, and repayment schedules across various lenders.

How To Qualify

Qualifying for a refinance loan differs from lender to lender. Each lender has its own factors to examine, such as revenue, time in business, minimum credit score, and so forth.

A few factors could hurt your chances of qualifying:

  • Recent bankruptcy filing
  • Outstanding tax liens
  • Poor credit scores
  • Not enough time in business

Keep these factors in mind when you're considering refinancing.

Tips

Here are a few tips you can follow as you’re applying for business loan refinancing:

  • Do the math on the exact amount you will save on a new loan
  • Choose a lender with a good reputation
  • Watch out for prepayment penalties on your original loan
  • Don’t overborrow

By following these tips you can help ensure a successful refinance. 

Is Refinancing Right for Your Business?

Refinancing may or may not be the right call. Consider the following:

When Should You Do It?

It’s important to remember that business loan refinancing doesn’t magically make your debt disappear. However, it repackages the debt in a way that optimizes your business.

Refinancing your business loan is recommended for businesses that have increased revenue since securing the original loan or improved their credit score. Businesses that have seen three to six months of lower debt ratios, higher net profit, and higher operating income have a better chance of getting approved.

When Should You Reconsider?

If you’re already struggling to make your current loan payments, refinancing likely won’t solve your problem. You also risk bankruptcy by trapping yourself in an endless debt cycle that might be hard to escape.

If you plan on keeping your business for the long term and can receive more favorable terms on a business loan refinancing, it could be a great decision. 

Alternative Business Loan Refinancing Option

Need funding to grow your business? Get loan offers that meet your specific business needs from several funders through Fundid Capital. Complete your application in as little as 15 minutes and work with a Fundid Advisor to pick the solution that works best for your growth goals. Explore your options

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About Fundid

Fundid is driven by a mission to empower business owners on their growth journeys by simplifying business finance & access to capital. 

We spend our time thinking about what the world would look like if the 80% of businesses that have under 10 employees had access to the capital they needed to grow and thrive. We're solving this with our Business Capital, Business-Building Card, and Resources that include our business Grant Match Program.

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