Best Ways to Refinance a Partially Paid-Off Business Loan

Business owners go back to the drawing board for all sorts of reasons. Some have seen their credit score rise substantially since they got their loan and may want to see whether they qualify for a better rate. Some find their business has been affected by the pandemic and are looking for more payment flexibility.

In some cases, lenders will agree to rework a loan for a customer. It depends on the terms of the loan and the interest rate, and there are a few things to know before calling the bank.

Your Credit Might Have Improved

Since you took out the loan, a lot could have changed. Your credit might have improved and so have your odds of getting a better interest rate. If so, you are in the best position to renegotiate your loan. There are a few options you can take.

First, check the documents for a prepayment penalty, which is a fee for paying off some or all of the balance before the maturity date. The penalty is often a percentage of the payment. Mortgages often carry prepayment penalties, while many states restrict or prohibit them for certain loans. If your loan has a penalty, it might cost more than the savings from the new terms, so the current loan may be the better deal.

To renegotiate a loan, look at the totality of your relationship with the lender, such as whether you have multiple accounts and would that be valuable to them. They would probably take a different approach if you are a valuable customer. It’s a good idea to know this before approaching them.

NerdWallet suggests shopping with another lender. Improved credit may help, but eligibility and rates depend on the lender’s review. Lenders like taking a sound loan from a rival. They may pay off the old loan and bring you on board, as long as there is no prepayment restriction.

Once you have found a better loan than the one you have, take that offer back to your own lender. They may offer refinancing or revised terms, but neither is guaranteed.

Their Finances Aren’t What They Were

Many business owners are calling to renegotiate loans because their finances aren’t what they were when they took out the loan. There are several different changes you can ask for.

An Investopedia article defines a renegotiated loan as a loan in which all the parties agree to change the original terms. An interest rate or the length of the loan can be changed, and sometimes the rate can even go from fixed to adjustable, and vice versa.

Lenders would much rather you pay them than not be able to pay anyone. They can lose a lot of money through a borrower who is forced into bankruptcy, so they might see some benefit in working it out with you. If you can’t get anywhere talking directly, many states have mediation programs for businesses and individuals.

A lender-approved forbearance program may temporarily change payments; a request alone does not change what is due. But lenders generally reserve it for borrowers in serious hardship, often as an alternative to foreclosure. If your business isn’t making enough money to cover the payments, a qualified financial professional can help assess whether refinancing fits your situation.

A Refinanced Loan

Working capital loans, microloans and equipment loans are some of the many kinds of business loans that can be refinanced. Interest rates can go down and so can monthly payments, freeing up working capital.

Refinancing gives you a fresh loan to pay off the old one, then you pay back the new loan. The biggest payoff here is that the money freed up by smaller monthly payments can be used to grow in a sustainable way.

You may not come out ahead on a refinanced loan. Also, refinancing may lower your credit score, and today’s rates may be higher than what you’re already paying. Consider consulting a financial advisor.

According to U.S. News and World Report, refinancing might cost 1% to 5% of the loan amount depending on fees, such as underwriting charges. That could be enough to dissuade many businesses, especially if it’s not a lot cheaper.