Refinancing swaps the old loan for a new one that pays it off immediately, putting the new one in its place.
The point of refinancing is to leave your business in a better financial position than before. But all refinancing does is change the terms of your debt, not make it go away. So take time to understand how the process works before you sign on the dotted line.
Reasons to Refinance
Lowering your interest rate is one of the biggest reasons to refinance. Freddie Mac says mortgage rates hit record lows during the pandemic, and Bankrate says personal loan rates hit all-time lows too. If you took out a loan more than a year or two ago, you may be able to refinance it at a better rate now. Or if your credit score has gone up or your business has become more successful since then, you may qualify for better terms than you did back then.
Another common reason to refinance is to switch a variable-rate loan to a fixed-rate one. Variable interest moves up or down with the market, so your monthly payments can change too. When rates are low, locking in a fixed rate might make sense. It will stay the same the whole term, so your monthly payment is predictable.
When your business is up against the wall, bringing down your debt payments can free up cash. Even when things are going well, the savings can keep going straight to your bottom line. A lower rate or a longer repayment term can both shrink the monthly payment, and the money freed up can cover operating expenses or be invested back in the business.
Consolidating turns several loans into one new one that pays them off. That cuts down the number of accounts to track and may even lower the payment. Sometimes it may shorten the time to repayment too, though not always. It can save money if it pays off high-interest debt like credit cards.
Any Loan Can Be Refinanced
Just about any loan can be refinanced. Mortgages are commonly refinanced, with Bankrate finding that 17% of homeowners refinanced in 2020.
But business loans can be too, including working capital, equipment, term, and commercial real estate loans.
Besides mortgages and business loans, personal and student loans and car loans can also be refinanced. Be careful, though: refinancing a federal student loan with a private lender means losing eligibility for government benefits like debt cancellation programs.
Requirements Similar to Those for Your Original Loan
To see if you’re eligible for a refinance, you must meet requirements similar to those for your original loan. Requirements are different for each lender, so review theirs before you apply. Begin by finding out your present balance and rate, then decide on the loan amount and the rate you’re aiming at.
When you refinance, the lender charges fees to prepare, process, and close the new loan. That cost has to be less than what you save by refinancing, or it is not worth doing. A refinance calculator can help you decide if the potential payoff justifies the cost. LendingTree lists fees like these, depending on the loan:
- An origination fee, usually in the neighborhood of 1% to 5% of the loan amount.
- An underwriting fee of about 1% of the loan.
- A loan guarantee fee if the SBA is involved, running 2% to 3.5% of the guaranteed portion.
- A prepayment penalty if your old loan charges one for closing it out ahead of schedule.
- Appraisal fees if the refinancing applies to an asset such as property.
The lender will take a hard look at your personal and business credit scores. That also includes your debt utilization ratio, what kinds of debt you have and how long you’ve had it for, as well as how many years you’ve been in business and how steady your income is. For a loan from a bank, have some backup material with you like:
- Your personal and business tax returns.
- Records of any accounts payable.
- Bank statements.
- A balance sheet and profit and loss statement.
- A business plan.
Look into several lenders, including the bank you already use, and get some initial rate quotes before you make a final choice. Pick the lender that offers the lowest rates with the best terms. But note that when you prequalify it may count as a hard pull against your credit, which can temporarily hurt your score. Only do so with lenders who use soft pulls to prequalify.
Refinancing a small business loan is not a panacea, so it pays to be informed before taking the step. Run the numbers and crunch the costs before you commit. When taken with good information, refinancing can be an important tool in the box for growing a business.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
