Refinance Business Loans: What You Need to Know
Jun 14, 2023 By Susan Kelly

Understanding when and how to refinance a business loan can be daunting for any entrepreneur, but it doesn't have to be. Whether you are curious about the process or looking to actively start shopping for better terms, this guide will provide all the information you need to decide on refinancing your business loan.

From understanding the right timing of a refinance and evaluating various options through comparing different types of loans, we'll explore every aspect and give you valuable insight into how best to tackle your loan refinancing project.

What is a Business Loan Refinance

A business loan refinance is taking out a new loan to pay off an existing one. This means you are replacing your current loan with a new one with different terms and conditions. Refinancing can be beneficial because the new loan should have more favorable terms, such as lower interest rates, longer repayment periods, or even a different type altogether.

When to Refinance Business Loans

Refinancing is only sometimes the best option for every business owner. Before deciding to refinance, it's important to consider factors like:

  • The length of time for which you plan on owning the business
  • Your current financial position
  • Your creditworthiness
  • The amount you owe relative to your income
  • The costs associated with refinancing

These are all important variables to consider when deciding on loan refinancing. In some cases, it may be better to wait and see if your business improves shortly or look for other sources of financing.

Types of Business Loans You Can Refinance

The key to successful loan refinancing is understanding the various types of available loans and their associated terms. Different lenders offer different types of loans with varying interest rates, repayment periods, and fees depending on your creditworthiness and the type of business you are running. Here is a brief overview of the most popular loan types:

Small Business Administration (SBA) Loans

These government-backed loans come with more favorable terms than traditional bank loans and can be used for various business purposes.

Business Line of Credit

Lines of credit provides more flexibility than traditional loans, allowing you to access funds as needed and make payments only on the amount used.

Short-Term Business Loans

These high-interest loans are designed for businesses that need quick access to capital but need help qualifying for other financing types.

Equipment Financing

This type of loan is specifically designed to finance purchasing or leasing equipment your business needs.

Invoice Financing

If your business relies on customer invoice payments, this loan lets you use those invoices as collateral to receive a lump sum payment upfront.

Factors to consider before refinancing a business loan

Before refinancing a business loan, it's important to understand what you will be getting into. Here are some key factors to consider:

  • Interest Rates and Fees: Compare interest rates and fees between lenders before choosing one. Some lenders may require collateral or extra fees that can add up over time.
  • Loan Term: Consider how long you need the loan, and choose a lender who offers terms that fit your needs.
  • Repayment Schedule: Be aware of any early repayment fees that may apply if you decide to pay off your loan ahead of schedule.
  • Credit Score: Your credit score plays an important role in determining the terms of your refinance, so make sure it is in good shape before you apply.
  • Tax Benefits: Refinancing can sometimes provide tax benefits, so check with your accountant to see if this applies to your situation.

These are just a few factors to consider when evaluating loan refinancing options. It's important to research and shop for the best terms available.

Benefits of Refinancing Your Business Loan

Refinancing your business loan can bring several benefits, including:

  • Lower Interest Rates: Refinancing can often result in lower interest rates than you currently pay. This will help reduce your total costs over the life of the loan.
  • Longer Repayment Periods: Refinance loans usually come with longer repayment periods than traditional loans, allowing you to spread out payments throughout a longer time frame.
  • Improved Cash Flow: With lower interest rates and longer repayment periods, refinancing can free up cash flow for other needs within your business.
  • Tax Advantages: Depending on the type of loan you refinance into, there may be tax advantages that further improve your bottom line.
  • Flexible Terms: Many refinance loans offer more flexible terms than traditional business loans, allowing you to tailor the loan to your needs.
  • Consolidation: Refinancing can consolidate multiple business loans into one convenient payment.
  • Improved Credit Score: When you make timely payments on a refinance loan, it will help improve your credit score over time and qualify you for better financing options in the future.
  • Additional Funding Options: Refinancing could open up additional funding options, such as lines of credit or other forms of financing, depending on the lender.

Refinancing your business loan can greatly reduce costs and take advantage of improved financing terms. It's important to consider all the factors involved before deciding, but the right approach can be a great way to improve your business's finances.

Drawbacks of Refinancing Your Business Loan

Refinancing can also have some downsides, such as:

  • Upfront Costs: There are often costs associated with refinancing, including application fees, closing costs, and origination fees.
  • Increased Debt Load: Refinancing could result in a larger loan amount than you currently owe, potentially leading to an increased debt load.
  • Reduced Flexibility: Refinance loans generally have fixed interest rates and repayment terms that offer little flexibility.
  • Credit Score Impact: The process of applying for a refinance loan could temporarily lower your credit score due to inquiries from lenders.
  • Higher Interest Rates: If your credit score has decreased since the original loan was issued, it could lead to higher interest rates on the refinance loan.

It's important to weigh all the pros and cons when considering loan refinancing. In some cases, it may be better to wait and see if your business improves shortly or simply look for other sources of financing.

FAQS

What is not a good reason to refinance?

Refinance is not a good idea simply because you are looking for a lower monthly payment, as this could cost you more in the long run. Refinance's also not advisable if your credit score has decreased since taking out the loan, as this could lead to higher interest rates.

What is the 80-20 rule in refinancing?

The 80/20 rule in refinancing refers to taking out a single loan that covers 80% of the cost of the home with another loan that covers 20%. This can benefit people with a good credit score but without enough saved up for a large down payment.

How to calculate LTV for refinancing?

Loan-to-value (LTV) ratio is calculated by dividing the loan amount by the appraised value of a property. For example, if you are applying for a refinance on a home valued at $100,000 and asking for a loan of $80,000, then your LTV would be 80%.

Conclusion

The overall process of refinancing a business loan can be complicated and require some effort. Navigating it correctly requires understanding the terms, carefully reviewing rates and fees, appropriately evaluating creditworthiness, and exploring your options in depth. However, knowing what to look for can allow small businesses to save thousands of dollars in interest on their loans. Taking advantage of lower interest rates with a refinance and better use of capital can lead to improved returns for business owners in the long run.