Best Ways to Lower Business Loan Payments

Maybe your credit history has improved since you first applied, and you want to see if you can get a better interest rate. Or perhaps you’re concerned about making regular payments due to the pandemic and want to arrange for lower monthly payments for the time being.

Lenders have some room to cut monthly payments, but how much they can cut depends on the interest rate and other terms of the loan. You will do better if you prepare beforehand.

Start with your credit score: loan applicants with higher scores generally get lower interest rates than those with lower scores, and if your score is higher now than when you initially applied for the loan, you may be able to get a better rate.

Read your loan agreement to find out if there is a prepayment penalty. This is a fee for paying off the loan early, often equivalent to a percentage of the total payment. Prepayment penalties are common on mortgages, but many states ban them, and whether or not they apply to your loan is worth a quick check. If your lender does levy a prepayment penalty, then doing nothing and keeping the loan may be your best course.

Think about what the bank wants from you as a customer, not just what you want from it as a lender. Having multiple accounts may give you leverage, for example, because the relationship gives the lender an incentive to help you out.

Pro tip from personal finance website NerdWallet: You are not the lender’s only option, so compare its offer with other lenders in the market, especially if you have a higher credit score. Do this if there is no prepayment penalty, because a new lender probably wants a good-credit customer and may pay off your old loan to win you.

Bankers hate losing customers, so go to your lender with any good offers you got from elsewhere and ask it to match or exceed those offers. The lender knows you’re serious and they must decide to keep or lose you.

Even though you took out your loans when things were better, ask for help anyway. Ask for an interest rate lower than the existing rate; ask for a longer time to repay; ask for any changes you think might help.

According to Investopedia, all parties to a renegotiated loan agree to change the original terms. This may mean lowering the interest rate, extending the term, or changing from a fixed to an adjustable-rate loan, or the reverse.

Bankruptcy scares banks. Banks are better off getting a renegotiated loan. So if you are in real trouble, they may be willing to change terms. You can press hard for a deal. Even if your lender will not change terms, many states offer mediation programs that can help both sides find common ground.

Another option is forbearance, a temporary pause of your mortgage payments in the face of financial hardship. Forbearance is usually a last resort when foreclosure looms. A new loan under terms more to your liking, known as refinancing, may be the better choice.

Plenty of small business loans can be refinanced including working capital loans, microloans, and equipment loans. You can save money on the new loan in two ways: a lower interest rate or smaller monthly payments. Lower payments mean more of your cash stays in the business instead of going to the bank.

When you refinance, the new loan gives you money to pay off the old debt, and then you start paying back the new loan.

Refinancing has downsides, too: besides any prepayment penalty, a new loan lowers your score. And if rates are higher now than when you borrowed, it may not even be worth it. Talk it through with a financial expert.

Not all businesses get much benefit. Up-front costs for refinancing often run around 1% to 5% of the total amount being refinanced, according to U.S. News and World Report. That’s a large bill for a small rate cut. Do not do it unless it is clearly worth it.