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?
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.
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.
While those benefits probably sound good to you, generally you need to meet certain conditions to actually get them and make refinancing worthwhile.
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?