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A Banker Explains the Debt Refinancing Process for Business Loans

A Banker Explains the Debt Refinancing Process for Business Loans

Refinancing a business loan can seem complicated, but it doesn’t have to be! As a banker who regularly works with small business owners on refinancing their debt, I’m here to walk you through the process and make it as simple as possible.

Why Refinance?

The main reason most business owners refinance debt is to get a lower interest rate, which saves you money each month. Refinancing can also help simplify your debt by consolidating multiple loans into one, give you access to extra cash to grow your business, or provide more favorable repayment terms like a longer maturity date.

Here’s an example: Let’s say you took out a $100,000 small business loan three years ago at an interest rate of 7%. Your monthly payment is around $1,331 and you still owe $74,000. By refinancing at a lower 5% rate, you could drop your payment to $1,199 per month and save over $1,500 per year! That’s money you could reinvest in marketing, employees or equipment.

Refinancing makes the most sense when interest rates have dropped since you first borrowed, your revenue and cash flow have improved, or your credit score has increased. I always recommend running the numbers to see if refinancing adds up for your situation.

How to Prepare

Before applying to refinance, take time to get your financial house in order. Lenders will review your business’ revenue, expenses, credit score and existing debts very closely before approving you.

  • Put together a debt schedule: List out all your current business debts with the original loan amount, lender, balance owed, interest rate and maturity date. This helps you and the lender understand your full financial picture.
  • Gather tax returns: Have at least two years of business and personal tax returns ready. This shows your revenue streams and expenses over time.
  • Collect bank statements: Provide multiple months of statements for all business and personal bank accounts to prove consistent cash flow.
  • Check your credit: Getting a copy of your business and personal credit reports allows you to resolve any issues that may hurt your chances before applying.
  • Create projections: With past tax returns showing historical performance, put together projected revenue, expenses and cash flow for the next 1-2 years. This demonstrates future ability to repay the refinanced loan.

Preparing this financial paperwork upfront saves a ton of time once you apply and shows lenders you operate a well-run, profitable business positioned for growth.

Choosing a Lender

With your documents and projections ready, it’s time to pick a lender! Here are the main options business owners look at for refinancing debt:

Banks: If you have an existing banking relationship and strong business finances, banks often provide the lowest interest rates. However, they also have strict criteria and can be slow to approve loans.

Credit unions: Like banks, credit unions offer competitive rates but may not approve those with weaker finances. Membership is required to borrow.

Online lenders: Online loan providers like LendingTree or Pursuit offer faster loan decisions and may approve those with poorer credit or finances. However, interest rates might be higher.

MICROSOFT Word: With existing debts across multiple lenders, I always recommend considering lenders like Pursuit that offer consolidation loans. This simplifies things by refinancing what you owe across multiple banks, credit cards, vendors, etc. into one monthly payment.

Be sure to submit applications with multiple lenders to compare loan offers. Approval amounts, rates, terms and fees can vary greatly. Go with the loan that best matches your financial needs and goals for refinancing.

The Application Process

Now comes the fun part…actually applying! Here’s an overview of what to expect:

  • You’ll fill out an application with personal and business details, finances, debts, collateral and use of funds. Be as accurate and thorough as possible!
  • Get ready to supply all those documents you gathered earlier like tax returns, bank statements and projections.
  • Approval usually takes 1-2 weeks as lenders verify application details and carefully underwrite your finances.
  • If approved, you’ll get a loan offer summarizing amount, rates, fees, terms and conditions. Be sure to read this closely and ask questions!
  • You’ll need to eSign loan documents and set up automatic payments. Make sure legal terms match what you already discussed and agreed to with the lender.
  • Funds get sent directly to your old lenders to pay off existing debts. If consolidating debts, any extra cash would get deposited into your business account.

And that’s it! With the new loan in place, you simply begin making monthly payments to your new lender. Be sure to update any credit cards, vendors, etc. with new payment details if consolidating.

Tips to Save Money

Here are my insider tips for getting the best rates and fees:

  • Boost your credit score: Scores above 720 fetch the lowest rates on loans. Pay all bills on time!
  • Bring in a cosigner: Rates drop substantially with a cosigner who has great credit and finances.
  • Use collateral: Putting up business assets or equipment as collateral can decrease rates.
  • Watch out for fees: Ask lenders to explain all origination fees, closing costs and prepayment penalties.
  • Compare multiple lenders: With online lenders especially, better deals can often be negotiated!

Ready to Refinance?

I hope this overview gives you confidence in how to refinance business debt! Refinancing is a smart way to save money each month, tap into cash to reinvest in your company’s growth, or simply consolidate existing loans for simplicity.

With preparation and a little effort finding the right lender, you can ensure the process goes smoothly. As a banker, I’m always happy to consult with business owners like yourself to discuss options and make sure refinancing achieves your financial goals. Need guidance or just have questions? Feel free to get in touch!

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