If you have a small business loan from a bank, there are two good reasons to renegotiate terms now. If your credit score has climbed, you might qualify for a lower interest rate. If the pandemic pushed you to the brink, your lender might work with you to bring your business payments down.
Lenders won’t agree to all these moves, of course. On a small business loan, much depends on the terms and rate you negotiated before. Here are some possible adjustments to explore with your lender.
Improve Your Loan’s Interest Rate or Term
If you’re doing better than you were, and your credit is the strongest it’s ever been, now could be the best time to improve your loan’s interest rate or term.
First, read the loan agreement to determine whether it has a prepayment penalty - a fee for paying off part or all of the balance early. The fee is usually expressed as a percentage of the payment. A prepayment penalty may make keeping your current terms the smarter move.
Next, evaluate your relationship with your bank. Many small businesses have multiple accounts with one bank. You want to present yourself as a customer the bank is motivated to keep. It’s worth noting any banking connections you can point to during the negotiation.
A qualified financial professional can help compare competing loan offers and their total costs. A new lender may offer refinancing, subject to its approval criteria and the terms of both loans.
A competing offer may provide leverage in a discussion with your current bank. The bank may agree to lower your rate or payments, but its decision depends on its policies and your circumstances.
As your local stores and restaurants rally against COVID-19, nearly every community has small business owners that are afloat for now but fear they’ll sink in the months ahead. If the coronavirus is hurting your business, there are several ways to change your terms, and even switch banks, if that would help.
According to Investopedia, renegotiating your terms means both sides agree to alter the terms of the original agreement: a bank may lower the interest rate and lengthen the terms of the loan, for instance, or refinance an adjustable-rate loan to a fixed rate.
One reason banks will go along with a renegotiation: your bankruptcy would cost them plenty. Bankruptcy is expensive and carries risks for the creditor, so working with the borrower is often the less painful path. Many states have mediation programs available to individuals and businesses alike, which can help if you cannot negotiate with a lender directly.
Another possible option is lender-approved forbearance. Forbearance may allow a temporary payment reduction or pause under terms agreed with the lender; discussions alone do not change payment obligations. Its suitability depends on your finances and the lender’s terms. A qualified financial professional can compare it with refinancing.
Refinancing
Types of loans that can be refinanced include working capital loans, equipment loans and microloans. Refinancing can let you get better terms on a new loan, such as a lower interest rate or lower monthly payment.
Put simply, refinancing means you take out a new loan and use it to pay off the old loan. You make payments on the new loan. The biggest plus for you? Lower payments can free up cash flow, so the money can be used to pay employees, buy inventory or launch a new line of business.
It’s not all good news. Paying off the old loan early may trigger prepayment penalties. The other big negative is that refinancing can ding your credit score. Rates may be higher now than when you took out the original loan. Seek the advice of professionals in the field before making a decision.
And just because you can refinance doesn’t mean you should. U.S. News and World Report found that underwriting and other refinancing fees may run 1% to 5% of the loan amount. That’s a lot for small businesses to risk. And if the savings on your payments are relatively small, it may not make sense to incur those fees.
About Delancey Street
Delancey Street is a business debt settlement company that helps business owners nationwide. Our goal is simple: negotiate proposed debt settlement terms with funders, subject to their agreement. Based out of New York, we work with business owners on settlement options. We tell you how it is; because your business and future is on the line.
