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Updated: April 8th, 2021
Refinancing can be intimidating. Thoughts of low interest rates and lower monthly payments may seem enticing, but demoralizing amortization schedules and longer repayment terms can be overwhelming.
Been in business for a few years? Those startup loans could be eating at your profits. Snagged a quick, expensive loan to cover an emergency? Those terms could be less than ideal.
Refinancing can re-right wrongs, lower your debt, and free up precious cash flow. However, it’s not always your best option.
When is it worth refinancing? What’s the best way to do it? And is it the right decision for your business?
Great questions. We have answers.
This comprehensive guide will arm you with everything you need to know about refinancing your small business debt. We’ll walk you through when to refinance (as well as when not to refinance) and how to do it the right way.
Everything from employees to equipment to the roof over your head costs money, and it’s not always money you have yet. Small business owners rely on loans, and that’s why over 43% of small businesses applied for a loan last year.
Further down the road, you may need additional financing or want to cut down your monthly expenses. That’s when debt refinancing comes in handy. However, it’s not a decision you should make on a whim.
Look for any of these five signs to indicate your business should refinancing a business loan.
Interest rates fluctuate from time to time, like when the Federal Reserve cut rates to help with economic recovery. If interest rates drop substantially, consider refinancing your business loan. A lower interest rate will lead to lower monthly payments and a cheaper (and potentially shorter) overall loan.
When your business is young or desperate, it’s easy to get locked into an expensive loan. However, with time, your credit score will improve. A better credit score will help you refinance and secure a loan with better interest rates and terms. If the first digit of your credit score has gone up, then that’s a sign that refinancing could be a good option.
If cash flow is low and you can’t find any other areas to cut costs, you may want to refinance. Refinancing can help you extend your loan, stretch your payments, and reduce your monthly expenses. While this will cost you more in the long run and take longer to pay off, it can be a worthwhile trade to save your business.
Lenders care about your credit score, but they also look at your annual revenue, years in business, collateral, accounts receivables, business plans, and more. If your company has grown and is in better condition than when you first secured the loan, then there’s a good chance you can refinance to reduce your interest and lower your monthly payments.
Refinancing isn’t free. Some lenders have loan application fees, appraisal fees, closing costs, and potential prepayment penalties. Plus, you reset your amortization schedule. It’s only worth refinancing if you’re committed to sticking with your business for the long haul. Sticking with your business will give you time to reap the financial rewards of refinancing.
Decided refinancing is right for your business? Here’s what to do next.
First, you’ll need to decide how you’re going to refinance your loan. You can use business term loans, lines of credit, ACH loans, and even business credit cards to refinance your loan.
Next, you’ll want to choose a lender to facilitate the loan. Lenders will offer varying terms, fees, and interest rates, so you’ll need to shop around to find the best refinancing loan for your business.
Traditional banks offer term loans and business lines of credit to help refinance your business debt. However, these financial institutions usually have strict credit and collateral requirements, making it difficult to qualify.
The Small Business Administration (SBA) offers various government-guaranteed loans that can help small business owners refinance their debt. SBA 7(a) loans, in particular, are perfect for refinancing or consolidating business debt. Borrowers with less-than-ideal credit can qualify, and the terms and interest rates are top-notch compared to bank loans.
Non-bank and online lenders typically have more lenient eligibility requirements, but you’ll need to do your homework to ensure you’re getting a good deal. At Funding Circle, we offer SBA 7(a) loans, business lines of credit, and term loans to help refinance your business debt. Learn more about all our small business loans here.
Michael Jones is a Senior Editor for Funding Circle, specializing in small business loans. He holds a degree in International Business and Economics from Boston University's Questrom School of Business. Prior to Funding Circle, Michael was the Head of Content for Bond Street, a venture-backed FinTech company specializing in small business loans. He has written extensively about small business loans, entrepreneurship, and marketing.