If you’re reading this, you’re probably thinking about refinancing your business loans. Maybe you want a lower monthly payment. Maybe you think you can get a lower interest rate. But how do you actually refinance business loans?
Well, you may already have an inkling of how refinancing works (perhaps from your mortgage or a personal loan). But here’s a refresher: when you refinance a business loan, you take an existing loan and replace it with a new one that has better rates or terms. In other words, you use a new loan to pay off your old loan, because your new loan gives you a better deal.
Of course, the actual refinancing process is a bit more complicated than that. But don’t worry, we’re going to walk you through every step.
Refinancing and debt consolidation get used pretty interchangeably, especially when talking about business loans. Technically, refinancing refers to replacing one existing loan with new terms, fees, and rates. Debt consolidation refers to combining several loans into one new loan with its own terms, fees, and rates. This guide can apply to either situation.
1. Learn whether you could benefit from refinancing
On the surface, business loan refinancing often sounds like a good idea. Lenders promise that refinancing can lower the cost of your monthly payment, free up more cash in your business, lower your interest rates, give you more working capital, and consolidate your existing debt payments. Neat, right?
- You can get a lower monthly payment to free up cash
- You can get a significantly better interest rate
- You have a stronger credit profile than when you took on your debt
- You want to release existing liens/collateral
- You’ll pay more in fees than you’ll save in interest
- Your credit profile is weaker than when you took on your debt
- You’ll have to make a balloon payment at the end of your term
But before you decide to refinance, let’s dig into those benefits to make sure refinancing is actually the right fit for your specific business loans.
Why you’d want to refinance business loans
One of the big reasons you might want to refinance is to change the cost or frequency of your loan payments. Depending on the refinancing amount, terms, and rates, you might be able to lower your loan payments by quite a bit. And if you’ve been stuck making weekly payments, there’s a good chance you can switch to monthly payments when you refinance.
Having a lower payment will, in turn, free up some of your budget, giving you more cash flow. It goes without saying why that’s a good thing―in fact, you probably already have ideas for how you could use any extra cash in your business’s pocket.
So how do you get those lower monthly payments? Well, a lot of the time you get it by refinancing with a lower interest rate or APR (annual percentage rate). That can lead to both a lower monthly payment and a lower loan cost overall―both good things.
Quick reminder: your interest rate and your APR are not the same thing. If you’re not sure how they’re different, take a look at our guide to APR.
While those benefits probably sound good to you, generally you need to meet certain conditions to actually get them and make refinancing worthwhile.
When to refinance business loans
In most cases, you’ll only want to refinance if you have a much stronger credit profile than when you applied for your current business loans. (Congrats if that’s true!) Better creditworthiness means you can actually qualify for things like lower rates and bigger loans.
Let’s say, for example, you took on your current loans when your business was only one year old, your FICO credit score was around 600, and you made $100,000 in annual revenue. If your business is now five years old, your personal credit score is closer to 700, and you make $250,000 in annual revenue, you’ll probably qualify for much better interest rates than you did a few years ago.
If your credit profile hasn’t changed much, you’re unlikely to get a much better deal―so refinancing probably isn’t worth your time or effort. Sorry.
One possible exception? If average interest rates have dropped across the board. You’ve probably seen this with the housing market, where average interest rates change over time (sometimes higher and sometimes lower). The same thing can happen with business loans. And if average business loan rates have dropped significantly, it might be worth trying to refinance.
By this point, you should have a better idea of whether or not you want to move forward with refinancing your business debt. Assuming you want to go for it, what do you do next?
2. Figure out what debt you plan to refinance
Before you start applying to refinance, you need to have a thorough understanding of what debt you want to refinance. You may have only one loan you want to refinance, or you may have several.
Either way, you should comb through whatever existing debt you have to find relevant details:
- Remaining loan balance
- Monthly payment cost
- Monthly payment cadence
- Interest rate
- Prepayment penalties
- Other relevant fees
- Annual percentage rate
These numbers are very important, so double-check them with your lender if you need to. You don’t want to be surprised later because you didn’t have all the facts (like by a surprise prepayment penalty).
This will do a couple of things for you.
First, it will help you figure out how much you need to ask your lender for when you refinance. In many cases, you’ll just want to ask for enough money to cover your existing debts. But if you want to borrow more money on top of that, this is a good time to figure that out. Either way, you should have a clear amount in mind.
Knowing the details of your debt will also help you do the math on whether or not refinancing is worth it.
If, for example, you see that your interest rate is only a little higher than what you think you could get by refinancing, you may decide it’s not worth it. Or if you find out that your current loans have big prepayment penalties (fees for paying off your loan balance early), you might realize that you won’t save any money by refinancing.
At this point, you can get a general idea of whether or not refinancing is worth doing with your business loans. But hold onto these numbers―you’ll need them later in step 5.
3. Choose a lender to refinance your business loans
If you’re ready to move forward with refinancing, then it’s time to choose a lender.
To narrow down your financing options, take a look at yourself and your business and list out your qualifications. By this, we mean the factors that lenders usually take into account when deciding whether or not you’d make a good borrower:
- Personal credit history
- Business credit score
- Time in business
- Annual revenue
Different lenders will accept different minimums for each of these factors, so look for a lender whose requirements match your profile.
And of course, try to find a lender who can actually give you a good deal on refinancing.
In many cases, SBA loans will be the way to go. These government-backed loans come with low interest rates and long terms. Plus, SBA 7(a) loans have been designed for refinancing (among other things), making them a great solution for many businesses.
To get an SBA 7(a) loan, you’ll need at least a 650 credit score. Your business also needs to be at least two years old.
As with all things government, the SBA loan application process can take a long time. Like, months long. To speed things up (at least a little), we recommend applying with a lending marketplace like SmartBiz. It can match you with different SBA lenders and make things move a little faster.
Many traditional financial institutions (banks and credit unions), also offer both SBA and non-SBA options for refinancing business loans. So if you already do business with Wells Fargo or some other bank, you might want to ask them about refinancing your loans.
We mostly recommend against refinancing with alternative lenders, also called online lenders. While these lenders have many great uses, they usually have much higher rates than banks do―not great when you’re trying to save money by refinancing.
4. Submit your refinancing application
Once you’ve chosen a lender, you’re ready to actually apply. If you’re going with an SBA 7(a) loan (and we recommend you do), then you’ll need these documents handy:
- Personal tax returns (last two years)
- Business tax returns (last two years)
- YTD profit and loss statement
- YTD balance sheet
- Debt schedule
Even if you’re not refinancing with an SBA loan, your lender will probably want those documents and any other relevant financial statements you have.
Be prepared for a more involved process than you might expect. While short-term business loans often come with a simple, fast application, refinancing usually has a longer, more involved process. You might have a back and forth with your lender, answering questions and submitting documents.
But once everything is submitted, you just have to wait for an answer. Hopefully, that answer comes in the form of a loan offer.
5. Do the math on your new loan offer
So let’s say you get an offer for refinancing. Awesome, right? Well, not to put a damper on things, but before you accept that offer, you need to do some math.
Remember how in step 2 you gathered all the details of your existing debt? Here’s where you’ll need that again.
Now that you have all the facts about your refinancing offer, you can compare actual costs of your current debt versus refinancing. (And don’t forget about any prepayment penalties on your existing loans!)
Some business loans include a balloon payment, or a large balance due at the end of the loan term. If your refinancing offer includes a balloon payment, you should think carefully about whether or not it’s a good idea.
As you do the math, make sure you include all relevant costs. Refinance business loans often with closing costs, for example. SBA 7(a) loans require a guarantee fee of up to 3%. And depending on where you get your SBA loan from, you may also pay a referral fee and a packaging fee. You’ll also want to consider down payment, collateral, and lien requirements.
With any luck, refinancing will be the clear winner, and you can accept the offer and get your loan. (Hurray!)
Want more options? Fund your business with a personal loan.
6. Pay off your old business loans
After you accept your refinancing offer, you may have to wait a few days or even weeks to get your funding. (This will depend on your lender and the type of refinancing business loan you chose.)
Some lenders will send funding directly to your old lenders, paying off the debt for you. Other lenders will send the funding to you, and you’ll be responsible for paying off the debt directly. If you’re not sure which method your lender uses, go ahead and ask.
Once your old debt gets paid, you may want to contact your previous lenders to make sure any associated liens get released. While the lien release process should be automatic, errors do get made, so it’s worth the phone call.
If you opted to get a larger loan with extra working capital, you can also use that how you see fit at this point.
Hopefully, by now, you’ve achieved whatever it was you wanted to get out refinancing―whether it was lower interest, lower monthly payments, more cash flow, or something else. And now you can sit back and enjoy the fruits of your refinancing labor. (At least for a couple minutes. We know you’re a busy small-business owner.)
Can I refinance a commercial loan?
Yes, you can refinance a commercial real estate loan. Some banks offer commercial refinancing, and you can also use SBA 7(a) loans to refinance real estate.
Keep in mind that if you choose to refinance commercial real estate loans, you’ll likely have to pay appraisal fees, closing costs, and other legal fees. So make sure that refinancing is worth it.
How do I refinance an SBA loan?
As a rule, you can’t refinance SBA loans. There are a couple exceptions to that rule, but you’ll probably need to talk with both your lender and an SBA office to figure out if you qualify.
What is a good interest rate on a business loan?
There’s no one answer for what a good interest rate on a business loan is, and a good interest rate for you might be different than a good interest rate for another business owner who has different qualifications and needs.
That said, SBA loans often have very low, competitive interest rates (it’s a government requirement, in fact). Right now, SBA 7(a) rates range from 6.25% to 8.5%.
Refinancing business loans can be a great way to improve cash flow, lower payments, and generally make your business debt more manageable.
While refinancing may not be the right choice for every business owner, we hope our guide helped you decide if it’s the right choice for you―and helped you figure out how to actually do it.
Need help with the refinancing math? Get some help from our business loan calculator.
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