What is business loan refinance and when to do it

When business finances become strained, refinancing is one way to minimize the financial burden. According to the 2023 Small Business Credit Survey, 24 percent of businesses seeking financing sought to refinance or pay down debt.

Business loan refinancing allows business owners to replace an existing loan with a new one, offering lower interest rates and monthly payments. However, deciding when to refinance a loan can be tricky.

We’ll go over when it makes sense to refinance, when it doesn’t and the steps to refinancing a business loan.

Why refinance a business loan

Refinancing a business loan means taking out a new loan and using that money to pay off the balance of an older loan. You can do so with your current lender or with a new one.

Refinancing allows you to change your loan details, such as the interest rate, monthly payment and repayment term.

Two of the top reasons to refinance a business loan are to reduce its overall cost or monthly payment.

If you can refinance a business loan for a lower interest rate, it will typically help you save money on the loan in the long run. Lower rates mean less interest will accrue over the loan’s term.

If your goal is reducing your monthly payment, you can take a few paths.

Lowering the loan’s interest is one strategy, but it is not always possible, depending on your creditworthiness and the current state of the lending market. Another option is to extend the loan’s term. This lets you spread your repayment over a longer period. But that increases the long-term cost of the loan by leaving more time for interest to accrue.

Another reason to refinance is to change the type of business loan you have. For example, refinancing could turn a line of credit with a variable interest rate into a fixed-rate term loan.

When to refinance your business loan

In general, you should consider refinancing when it can help you save money or offer another benefit to your company, such as by lowering your monthly loan payments to improve cash flow.

Market rates have fallen

Interest rates on loans are influenced by a wide variety of factors, such as your company’s credit score and financial situation, but there is one major factor you have no control over.

Rates on all types of loans rise and fall in response to market forces. One major influencer over the rate market is the Federal Reserve’s federal funds rate. The Fed adjusts this rate, increasing it to fight inflation and lowering it when the economy slows.

When the Federal Funds Rate is high, loans tend to become more expensive. When it’s low, loans tend to get cheaper. This is especially true for interest rates pegged to the prime rate and Secured Overnight Financing Rate, which move in lockstep with the Fed’s rate adjustments. Many SBA loan rates, for example, are pegged to prime.

If you got your loan when market rates were high, and rates have since fallen, refinancing might help you save money.

Your personal or business credit scores have increased

Most lenders weigh credit scores and history heavily when determining loan interest rates. Your credit score helps lenders decide whether you and your business can be counted on to repay loans on time. A lower score translates to higher rates as lenders try to compensate for the risk of lending to you.

For business loans, both your personal and business credit scores can influence rates (though small business lenders more often consider your personal score). If you’ve boosted those scores since getting the loan, you might be able to refinance at a lower rate.

You’ve improved your business’s revenue or profitability

Lenders tend to care about one thing: Whether you’ll pay back the money that you borrow. Lenders compensate for risk by raising rates, so companies that look risky to lenders tend to pay higher interest rates.

If you got your loan when your company was not making a lot of money, your business probably looked like a big risk. If its financial situation has improved and you have the financial records — such as the balance in your business bank account and tax statements — to prove it, refinancing when you look like less of a risk can help you lower your loan’s rate.

You got your initial loan when your company was young

Another major risk factor in the eyes of lenders is the age of a company. New companies, especially those just a few months or a year old, are huge risks. The owners likely have limited experience, and the business doesn’t have a track record of making timely payments.

All that translates into more expensive loans.

If you got a term loan when your company was young, a few years of success can show that your company isn’t a risk and lower your loan costs.

Banks typically have lower rates and higher time in business requirements than online lenders, so if you recently passed the two-year threshold, try looking into refinancing with a bank.

When to hold off on refinancing a business loan

Refinancing is a good idea in many situations, but there are times when it will cost you money and not bring many benefits.

Market rates have risen

If market rates have gone up since you got your loan, you might not be able to secure a new loan at a lower rate, even if your credit or business financials have improved.

That means refinancing will simply make your loan more costly.

Loan rates were on the rise throughout 2023, and it is expected the Federal Reserve will leave rates at 5.25-5.50 percent, though there have been talks of cuts in 2024. That said, if you got your loan within the last couple of years, now may not be the best time to refinance.

Your personal or business credit scores have dropped

If your company’s credit or your personal credit scores have dropped since you got your loan, you might struggle to qualify for similar interest rates. If the decrease in credit score is significant, you might not be able to qualify at all.

Your company’s revenue or profitability is stagnant or falling

If your business is getting less profitable or losing revenue, that’s a big red flag for lenders. You’ll have trouble refinancing at a good interest rate. Some lenders might require you to put up collateral or place a blanket lien on your business assets. Or they may simply refuse to approve your application.

How to refinance a business loan

Refinancing a business loan can provide opportunities for improved financial stability and growth. Here’s a quick overview of the business loan refinancing process.

1. Review your business loan details: Look at your existing loan, focusing on the type of loan, balance, interest rate, monthly payment and remaining payments.
2. Determine your refinancing goals: There are a lot of reasons to refinance, but ask yourself how refinancing can help. If you had a startup business loan, refinancing could get you a lower interest rate or more affordable monthly payment, making it easier to manage your business loan.
3. Confirm your eligibility: When refinancing, lenders will want to know your personal and business credit scores and the details about your business finances, such as annual revenue. You should know or have this information available to evaluate your odds of approval.
4. Gather your business paperwork: You’ll be required to submit business documentation when applying for refinancing, including bank statements, business licenses and proof of collateral if you have a secured loan.
5. Shop around and compare loan options: It’s wise to shop around and compare lenders, especially the available loan amounts, interest rates, terms, fees and collateral requirements.
6. Submit your application: Once you choose a lender, you can submit your application along with any required documentation.

As you review lenders, ask yourself the following questions to help you narrow down your options.

• Is there a down payment, and how much is it?
• Are there any closing costs, prepayment penalties or other fees assessed?
• If required, what type of collateral is acceptable?
• What is the total cost of the loan?

Should I consolidate my loans?

If you have multiple loans for your business, weigh the pros and cons of consolidating your loans instead of refinancing them individually.

Consolidating business debt means getting one new loan and using the money to pay off multiple existing loans. You trade several loans and their corresponding monthly payments for one loan and payment that’s easier to manage.

When consolidating, you have to consider many of the same factors as refinancing, such as whether you can secure a new loan with a lower interest rate.

The major advantage is the simplicity of only applying for one new loan and only managing a single loan going forward.

But remember that your existing loans likely all have different terms. If you consolidate, that might lengthen the terms of some loans and shorten the terms of others. That makes the math on whether you save money overall more complicated. You can use a business loan calculator to compare the results.

Business refinancing vs. debt consolidation

When choosing between business refinancing and debt consolidation, the decision depends on your specific financial circumstances and goals.

Generally, consolidation is a good option if your main goal is to manage your debt better and only have one monthly payment. Refinancing each loan individually might help you save more money overall by lowering the interest rates, which will likely lower your monthly payment. But, with refinancing, you’ll still need to manage each loan payment separately.

Bottom line

Choosing the optimal time to refinance a business loan can be tricky, as it requires careful consideration of various factors. Monitoring market trends, interest rates and the financial health of your company, as well as assessing potential savings, cash flow improvements and long-term goals, can help you make an informed decision. Ultimately, if it’s the right time, refinancing could potentially secure a stronger financial future for your business.

Frequently asked questions

• How long before you can refinance a business loan?

  The waiting period for refinancing a business loan can vary depending on the lender and the terms of your existing loan, so it is best to speak with your lender regarding any specific refinancing requirements.

• Can I refinance my SBA business loan?

  Yes, it is possible to refinance your SBA business loan.