Refinance Business Loans: What You Need to Know

Refinancing a business loan can help you lower your monthly payments, take advantage of a lower interest rate or pay off your loan sooner.

However, not everyone can qualify for the lowest rates. Plus, a business loan refinance won’t solve your debt problems if you struggle to make payments. Here’s what you need to know about business loan refinancing and tips for deciding if it’s a smart move for you.

What does it mean to refinance a business loan?

Refinancing a business loan is a lot like refinancing a mortgage: You replace your existing business loan by applying for a new business loan. That new loan pays off your old loan and replaces it with a new loan, ideally with a better deal than your old one. You could refinance a business loan to get a lower interest rate, a longer repayment time, a lower monthly payment or more favorable terms, like less frequent payments.

You can try refinancing with the same lender or explore different funding options, such as a bank, online lender or with an SBA loan. Your new rates and terms will depend on the lender’s offerings and your personal and business qualifications. Furthermore, your existing loan might charge a prepayment penalty, while your new loan might have additional costs, such as origination, underwriting or SBA guarantee fees.

If your new loan’s estimated expenses seem high, it’s best to postpone a business loan refinance. But if you find a significantly lower rate, a refinance could help reduce your monthly bill and give your budget some extra breathing room.

Types of business loans that can be refinanced

Most business loans can be refinanced as long as your business meets the lender’s requirements. Here are the most common types of business loans that can be refinanced:

• Term loans. Term loans offer a lump sum with a fixed repayment term. You may qualify for a better rate if your revenue and credit score have improved since the original loan.
• Working capital loans. A working capital loan can help cover short-term business expenses, such as payroll, daily operating costs and inventory. As long as you meet the lender’s criteria, you can refinance working capital loans.
• Equipment loans. Equipment loans help you purchase or upgrade equipment or machinery needed for your business. Having some equity in the equipment might help you secure a competitive rate with a refinance lender since the equipment acts as collateral for the loan.
• Commercial real estate loans. You can purchase or lease property with a commercial real estate loan. Your business’s mortgage can be refinanced just as you can refinance a personal mortgage.
• Microloans. Microloans can help startups and underserved communities access small infusions of capital. Similar to a term loan, you might qualify for a reduced rate if your business has grown since you originally borrowed the loan.

Business loan refinancing vs. debt consolidation

Business loan refinancing and debt consolidation both can help you manage your debt. However, it’s important to understand the key differences between the two.

• Business loan refinancing: A lender pays off your existing business loan and issues a new loan, hopefully with a lower interest rate and monthly payment. This lower rate can reduce your interest charges, helping you save more money.
• Business debt consolidation: You can combine multiple loans into a new consolidation loan with one easy-to-manage payment. While getting a lower rate is an added benefit, the primary purpose of business debt consolidation is to simplify your various loan payments.

If your ultimate goal is to save on interest, a business loan refinance could be the right choice for you.

Pros and cons of refinancing business loans

If your qualifications are in good shape, you could secure a competitive rate that lowers your monthly payment and reduces the stress on your business’s cash flow. Your refinance lender might even approve a higher funding limit, helping you tackle critical business expenses and expansions.

However, not everyone can qualify for the best rates. Furthermore, you might need to pay a hefty prepayment penalty on your current business loan, which could offset your potential savings. And while refinancing for a longer term could reduce your monthly bill, it will likely result in higher interest charges over the life of the loan.

How to refinance a business loan in five steps

1. Determine how much you owe

Review your existing business loan progress to ensure any new loan offers can provide better rates and terms than your current one.

Check your online account or contact your lender for the following details:

• Your loan’s outstanding balancing
• How much time is left to repay the loan
• Your current repayment schedule, including weekly or monthly bill
• Your current business loan interest rate
• Your lender’s prepayment penalties (if applicable)

You can also request a payoff quote from your lender. This will show the total amount needed to pay off your existing business loan, including any interest that will accrue between now and the payoff date.

2. Set a refinancing goal

Defining a goal in advance can help you narrow down the best refinancing deal for your needs. Some business owners want a lower monthly payment, which could mean refinancing to have a longer repayment term. Others want to get out of debt as fast as possible and may be looking for a lower interest rate.

Note that extending your loan term can reduce your monthly bill, but typically results in more accrued interest over the long run. Instead, try to find the lowest business loan interest rate to lower your payments while slashing the overall cost of your debt.

3. Evaluate your qualifications

Review your business’s eligibility to determine what loan types and amounts you might qualify for before starting the application process.

Lenders typically look at the following criteria for a business loan refinance:

• Personal credit score
• Business credit score
• Time in business
• Annual revenue

You might also need to provide collateral with a secured business loan. However, if your credit score, time in business or annual revenue has improved since your original loan, you might have a better chance of unlocking lower rates and more attractive terms with your refinance.

4. Research and compare lenders

You can likely apply for business loan refinancing with your current lender or try a new lender. Here are the most common options to refinance business debt:

• Traditional banks: Traditional banks and credit unions tend to offer the most competitive interest rates and flexible terms but generally have stricter business loan requirements and lengthy application processes.
• Online lenders: Many alternative lenders offer flexible eligibility requirements, focusing on getting you the funds you need within a few days. Although online loans can help those with limited or poor credit access capital, beware of higher interest rates and unfavorable terms.
• SBA lenders: Since the Small Business Administration guarantees a portion of SBA loans, they are generally easier to qualify for than traditional bank loans. However, you must still meet SBA refinance criteria, including a good personal credit score.

Some lenders lure you in with an outstanding offer, only to list hidden fees in the fine print. Be sure to inquire about interest rates, extra fees, the payment schedule and qualification requirements, as well as any prepayment penalties.

5. Gather documents and apply

Once you’ve found the best business loan refinance for your company’s needs, save time by gathering required documents in advance. What you need will vary by lender, but here are some standard business loan documents you may need to provide:

• Proof of ownership or business license
• Employee identification number (EIN)
• Personal and business bank statements
• Personal and business tax returns
• Balance sheets
• Current loan statements
• Business plan
• Collateral information (if required)

If you receive approval for a business refinance, thoroughly review the contract to ensure it’s the best option for your business.

When to consider business loan refinancing

Refinancing doesn’t make your debt disappear. It repackages your debt in a way that should work better with your budget.

Ask yourself the following questions before making a decision:

• Are your personal and business credit scores in the good to excellent range?
• Has your company’s annual revenue increased?
• Has your business been in operation for two years or longer?
• Are average business loan interest rates on a downward trend?
• Has your business experienced growth and development?
• Does your business have a solid cash flow?
• Have you defined your goals for a business loan refinance?

Refinancing won’t solve your problems if you struggle to manage your loan payments. Taking on more debt to pay off your existing balance could put you in an ongoing debt cycle that may be difficult to escape. You risk facing bankruptcy or losing your business or personal assets if you cannot repay loans.

On the other hand, a significant improvement in your business finances, such as higher net profits, lower debt ratios and greater operating income, could help you unlock better rates and terms.

Compare lenders and calculate your potential savings before committing to a business loan refinance to ensure it’s a financially sound decision.