What are refinancing options for my business?

Interest rates are hovering at near zero and are expected to remain at record low levels for the foreseeable future. After months of lockdowns as a result of the COVID-19 pandemic, business owners could use all of the cash flow they can get. Refinancing to save money on monthly expenses is one way to capture more of that cash. You need to be able to focus on investing in your business and bolstering profits. 

If you’re wondering whether you should refinance during coronavirus, we’ll explore some of the key reasons why it might be a good fit. During these uncertain times, especially. 

There is no shortage of refinancing options for your business. In this article, we’ll explore some key reasons why you may want to refinance existing business debt.

Refinancing in a nutshell

There are many possible scenarios where it makes sense to refinance your business loan. Whether you want to slash your monthly payments with a lower APR, reduce the total cost of your loan, or just extend the maturity of the it, refinancing existing debt could be the answer. It could free up some cash flow that can be directed toward other expenses. These might include hiring, expanding, buying equipment, or restocking inventory now that the economy is coming back to life. 

Think back to when you took out your current business loan. Chances are you accessed financing to grow your business. Refinancing isn’t too different. You’ll be taking out an entirely new loan in the process. The proceeds of the new loan will be directed toward repaying an existing loan or multiple loans. Ideally, providing you with more favorable terms than you had before. For instance, you could possibly lock in a lower interest rate, extend the repayment period, or kill two birds with one stone and do both. 

To do this, you’ll have to reapply for another business loan, either with the lender that issued the original loan or another lender. This varies depending on the circumstances. We’ll explore in more detail below. 

SBA refinancing options to save money 

SBA loans are known for their attractive terms. These might include below-market interest rates and lengthy repayment periods of up to a decade or even longer for real estate financing. You might be able to refinance an existing SBA 7(a) or 504 loan with even better terms if you meet the agency’s standards for doing so. There are some restrictions to keep in mind, however.  The two scenarios we’ll explore are (1) refinancing a non-SBA loan with an SBA loan and (2) refinancing an SBA loan with another SBA loan. 

Refinancing non-SBA loans

To refinance a non-SBA loan with an SBA loan involves exhausting your other options first. Then you need to prove that the terms of those options are not reasonable. Unreasonable terms from the SBA’s point of view include – 

• The debt is structured with a balloon payment 
• The lender agrees the debt no longer meets the business owner’s needs
• The interest rate on the existing loan is higher than the SBA’s maximum rate
• The loan was overcollateralized from the beginning, though any new loan must still meet the SBA’s collateral requirements
• The loan maturity is not relevant to the use case for the financing, such as having a three-year term to finance a machine that will run for more than a decade

To be eligible, the business owner’s current loan should be in good standing. The SBA will want to know about any late payments or fees over the last 36-month period. The new loan should also provide a clear benefit to the business owner, including a payment amount that is at least 10% lower than the current loan. If you choose to refinance with an SBA 7(a) loan through Funding Circle, you won’t face any prepayment penalties. 

Refinancing SBA loans

You might also want to refinance existing SBA debt. To do so, you’ll need to jump through a few hoops. For instance, if you have a small loan from a few years ago that you’d like to replace with a bigger loan, refinancing during coronavirus could be the way to go. 

If you go to your original lender and ask for a modification to the terms but they say no, you are free to go to another SBA lender. The latter is inclined to say yes and will refinance the smaller loan into the bigger one.  While the SBA backs a large percentage of the loan, they aren’t the ones actually issuing the loans themselves. The bank or online lender is. 

Keep in mind 

If you decide to refinance a business loan, you can expect the lender to access your credit reports again to see if anything has changed. This could have an impact on your personal and business credit scores. At first, your score could trend lower because there’s been another pull on your credit. But over the long term, your credit scores could benefit. This is especially true if you’re replacing credit card and short-term debt with the new loan. That’s because your credit utilization score for those products will decline, which is viewed favorably by creditors. 

If you want to refinance credit card debt, the business owner must show that the original debt was taken on for business reasons only. 

Also, before you apply for another loan you might want to learn if there are any prepayment penalties for paying off the original debt early. The original loan might also be subject to closing fees. 

Lastly, considering that your new loan will replace the old one, you might want to learn if there are any prepayment penalties for paying off the original debt early. Otherwise you might find that the cost of refinancing outweighs the benefits.

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