Key takeaways
- Refinancing a loan involves getting a new loan to pay off an old debt
- If you have multiple loans, you can either refinance them individually or consolidate them into a single loan
- The two main reasons to refinance a business loan are to lower payments or interest rate
Many businesses rely on credit and loans to cover shortfalls or fund expansion, but you may not always be happy with your terms. Refinancing a business loan can allow you to not only lower your interest rate and expand your repayment schedule but you may be able to take out additional funds to pay bills or finance important projects. In fact, according to the 2023 Small Business Credit Survey, 24 percent of businesses apply for financing with the intent to refinance or pay down other debt.
Refinancing can help improve cash flow and pay off a previous loan with unfavorable terms. Refinancing isn’t hard, but to increase your chances of approval, you’ll want to closely follow the required steps.
6 steps to refinance a business loan
The path toward a successful refinance may differ from lender to lender, but there are some common steps that you need to follow. This includes gathering important documents in advance, like information about your existing loan and financial documents relating to your business.
1. Gather your loan details
The first step in refinancing a business loan is to take inventory of your company’s existing loans. The key details to determine for each loan are:
- The type of loan (secured or unsecured, line of credit vs. term loan, etc.)
- The outstanding balance
- The interest rate
- The monthly payment
- The number of payments remaining
- The total amount you’ll pay over the remaining life of the loan
Each monthly loan statement should contain these details, but you can always reach out to your lender to confirm if you aren’t sure. Having these details on hand is essential for the rest of the process.
The types of business loans that can be refinanced include:
- Business term loans: Term loans provide a lump sum of cash paid back in installments over time. These loans are often used to make large, one-time purchases such as equipment or real estate.
- Lines of credit: A line of credit provides a revolving form of funding businesses can access as needed.
- Working capital loans: Working capital loans are designed to fund everyday operating expenses for businesses. This might include sales and marketing costs, payroll and rent.
- Equipment loans: As the name indicates, equipment loans are designed to fund the purchase of equipment needed for the business.
- Commercial real estate loans: Commercial loans provide funding for real estate purchases. The proceeds must be used to buy commercial property, not residential property.
- Short-term business loans: Designed for short-term needs or emergencies, short-term loans are used to temporarily cover cash-flow shortfalls.
2. Determine your goals
You might consider refinancing a loan for a few reasons, but the two most common are to lower the loan’s interest rate and reduce the loan’s monthly payment. Once you refinance, your previous loan is paid off and replaced with a new loan. It typically makes the most sense to refinance only when you’re replacing old loan terms with more favorable ones.
If your goal is reducing your debt’s interest rate, you need only compare the rates of your existing loans to those available on new loans. If new loans are offering lower rates, refinancing could work.
If you want to lower your monthly payments, there are multiple ways to do that. Lowering the rate but maintaining the same term is one way. You could also extend your loan’s term. However, that has the drawback of increasing the overall cost of the loan.
Bankrate insight
3. Check your credit and eligibility
Because you’re replacing your old loans, you’ll need to qualify for a new loan. Before spending too much time trying to refinance, make sure you have a good shot at qualifying.
Some metrics to look at include:
Having a high credit score, low debt-to-income ratio and high revenue will give you the best chances of qualifying for a new loan. Make sure you also look at any additional requirements lenders mention, such as a certain amount of time in business or lack of previous bankruptcies.
If you have a heavy debt load, poor credit or poor revenue, you might struggle to refinance with beneficial terms. Try looking into bad credit business loans, but prepare to wait until your financial circumstances are better to refinance.
4. Gather paperwork
Applying for a new loan to refinance existing debt means going through the full application process. Prepare to provide documentation including:
- Business financial documents, such as profit and loss statements, balance sheets, accounts payable/receivable reports, payroll records, commercial lease
- Business tax ID number
- Bank statements
- Business licenses
- Proof of collateral (for secured loans)
- Disclosure of any other debts
- Any relevant contracts, ownership agreements, etc.
You’ll also have to provide personal identification documents, such as a driver’s license. Gather these documents before applying to keep the application process running smoothly.
5. Compare loan options
Do some research to find the right lender. You’ll want to look at a few different loan companies and compare different aspects of their loans, such as:
It’s also a good idea to reach out to your existing lender to find out what loan options it may offer. Because you have an existing relationship, your current lender may offer a deal or more favorable loan terms.
| Lender | Description |
|---|---|
| Traditional banks and credit unions | Banks and credit unions are known for offering a variety of business loans, including term loans, lines of credit and equipment financing. The funding process may be slower than other types of lenders, and qualification requirements may be more stringent. |
| SBA lenders | SBA loans often provide very competitive terms and rates. Though there are specific requirements to get an SBA loan. Receiving the funds can also take longer than other options. |
| Online lenders | Online lenders typically provide a quick application and funding timeline compared to banks and credit unions. Loan options are typically similar to those available from traditional lenders, but interest rates may be higher. |
Choose the lender whose loans will help you accomplish your goals. For example, if you’re trying to lower the interest rate on your company’s debt, go with the lender with the lowest available rates. If your goal is reducing the monthly payment, you might focus more on lenders that offer long repayment periods.
If a lender offers prequalification, you can try to prequalify to get a better idea of the exact rates and terms a lender will offer to your business. As a bonus, prequalification requires only a soft credit check, so it won’t impact your credit score.
Bankrate insight
The 2023 Small Business Credit Survey found that 52 percent of applicants who sought funding through a small bank were fully funded, while large banks fully approved just 44 percent of applications. Online lenders fully approved just 31 percent of applications but partially funded 38 percent. Businesses seeking SBA-backed funding were fully approved 34 percent of the time.
6. Submit an application
When you’ve identified the best lender for your company, it’s time to submit the final application. Fill out the required paperwork and wait for the lender to make a decision.
Remember, it can take time to find out whether your refinancing application is approved. If your application is rejected, don’t despair. You can apply again. Typically, it’s a good idea to wait at least 30 days before reapplying for a loan.
Tips for refinancing
- Get multiple offers and compare loan costs carefully
- Don’t overlook the cost of prepayment penalties for your current loan
- Avoid running up new debt once you’ve refinanced
The bottom line
Refinancing a business loan can be a valuable step that allows you to obtain more favorable loan terms, lower your interest rate or both. That said, obtaining the best rates and terms relies largely upon having a competitive application, including a good credit score and a solid revenue stream.
If your business’s credit score or revenue has increased or if you’ve lengthened your time in business, it may make sense to refinance to save money. If you’re unable to obtain a better interest rate or you’ll pay a steep prepayment penalty to exit your current loan, refinancing may not be the right move.
Frequently asked questions about business loan refinancing
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In theory, you can refinance a business loan immediately. If you want to refinance with the same lender, they might be unwilling to approve a new loan. And some lenders won’t refinance a loan until you’ve made a certain number of payments. Realistically, things like loan origination fees add up if you try to refinance frequently, so you’ll want to wait a few months to a year at a minimum between each refinance.
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Yes, it is possible to refinance business debt with an SBA loan. Keep in mind that SBA loans can involve more paperwork and take longer for approval than other types of loans. The SBA may restrict when you can use an SBA loan to refinance other debt.
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Refinancing may come at a cost. If your existing loan has an early repayment penalty, you’ll have to pay it. Your new loan may come with an origination fee or have a higher total cost than your previous loan. You need to crunch the numbers to determine if the additional costs are worth the benefit.
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