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Business loans can typically be refinanced, just like mortgages or other personal loans. When you refinance, you apply for a new small-business loan — ideally with more favorable rates and terms — in order to pay off your existing debt.
If you can save on borrowing costs, refinancing may be a good option for your business. Refinancing isn’t right for all situations, however, and could create a cycle of debt if you’re already struggling to make payments.
Here’s everything you need to know about how and when to refinance your business loan.
How Much Do You Need?
What does it mean to refinance a business loan?
Refinancing a business loan involves applying for a new loan, from the same or a different lender, to pay off your existing debt. In general, the goal of refinancing is to save your business money and streamline cash flow.
Ideally, you should achieve this goal by refinancing to a loan with more desirable terms, such as:
Lower interest rates.
Lower monthly payments.
A longer repayment period.
Less frequent payments.
You can refinance your business loan through several different funding options, including bank loans, online loans and SBA loans. However, your ability to refinance existing debt will largely depend on the individual business lender, the terms of your current loan and your business’s qualifications.
For example, you can refinance existing debt into an SBA loan — but you’ll have to meet specific eligibility criteria regarding your use of proceeds, available collateral and current interest rates.
Along the same lines, it’s possible to refinance an existing SBA loan with another SBA loan, but it’s not common. You may be able to refinance if your lender won’t modify the terms on your existing loan or if you need additional capital and it’s not possible to increase the amount of your current SBA loan.
Refinancing vs. business debt consolidation
Business loan refinancing is sometimes confused for or mistakenly equated with debt consolidation.
Business debt consolidation, however, involves combining multiple loans into one. You use the new loan to cover your existing debt — instead of continuing to pay several loans separately — and then you only have to worry about making payments on the newer loan.
With a business consolidation loan, you pay a single lender and follow one repayment schedule. Unlike business loan refinancing, the goal of debt consolidation isn’t necessarily saving money — although getting a lower interest rate could be an added benefit. Instead, the goal of business debt consolidation is typically to simplify your payment schedule and make your debt more manageable.
5 steps to refinance a business loan
If you’re looking to refinance a small-business loan, follow these steps to get started.
1. Set your refinancing goal.
Before searching for new loan options, you’ll want to lay out exactly what you hope to achieve by refinancing. Are you trying to:
Lower your monthly payments?
Make payments less frequently?
Lower the cost of your debt?
By answering these questions, you can get a better idea of the terms and/or rates you aim to secure on your new loan, which will help streamline your search process.
2. Determine how much you owe on your existing loan.
In order to get the best refinancing deal, you’ll want to properly understand the state of your current business loan. You should review:
Your outstanding loan balance.
How much time is left in the loan term.
Your loan payment schedule, including the payment amount.
Your current interest rate.
You’ll also want to determine if your existing lender has prepayment penalties — and if so, how the cost of those penalties could impact your refinance.
3. Review your qualifications.
You’ll want to evaluate your business’s eligibility criteria to determine what type of loan you can qualify for before starting your search.
Most lenders will look at your personal credit score, time in business and annual revenue when underwriting your loan application. Lenders may also consider your available collateral, cash flow and financial accounts.
If your credit score or annual revenue has improved since you got your existing loan, you’ll want to highlight this growth when you apply for refinancing — as it can help you access more competitive rates and terms. Similarly, your length of time in business can benefit your refinancing application, particularly if you were just starting out when you took out your current loan.
4. Research and compare lenders.
When you refinance your business loan, you can apply for financing from your current lender or a new lender. In general, you’ll want to research and compare three types of lenders:
Banks. Traditional lenders typically offer the lowest interest rates and most desirable terms, but also have strict business loan requirements and are slow to fund.
SBA lenders. Although you’ll have to meet specific requirements to refinance with an SBA loan, these products have competitive rates and terms. SBA loans may be slightly easier to qualify for than bank loans, but you’ll still need to meet strong criteria. These loans are also slow to fund.
Online lenders. Alternative lenders can often provide fast financing and offer flexible eligibility requirements. Online loans tend to have higher interest rates than other options, however, so you’ll want to make sure that refinancing with one of these lenders is affordable for your business.
As you do your research, you’ll want to compare options in terms of interest rates, repayment terms, payment schedules and fees — as well as qualification requirements.
5. Gather documentation and submit your application.
Once you’ve determined the best option for your needs, you can gather any documents you need to complete and submit your business loan application. The specific paperwork you need will vary based on the lender, but typically you’ll be asked to provide some or all of the following:
Basic information about you and your business.
Personal and business bank statements.
Personal and business tax returns.
Financial statements, such as profit and loss statements or balance sheets.
Current debt schedule.
If you’re approved for a refinance loan, you’ll want to thoroughly review the terms and conditions of the offer to figure out if it’s the most competitive option for your business. You should also consider whether the new loan meets your initial refinancing goals.
Should you refinance your business loan?
Refinancing can help you better manage your business debt, but it’s not always the best option for every situation. Here are some instances, however, where you might consider refinancing:
You’ve strengthened your loan qualifications. If you’ve improved your credit score, annual revenue or time in business, you may be able to qualify for a loan with better rates and terms. If you refinance, you’ll hopefully be able to make your business debt more affordable.
Your existing loan is expensive. If your existing loan has high interest rates and payments that eat into your cash flow, refinancing could be a good option. Ideally, your refinanced loan will offer better terms that make paying off your debt more manageable — and open up cash flow for your business.
You have the potential to save money. Interest rates may have been higher when you originally took out your loan, and have come down since. If you can refinance to a more competitive interest rate, or turn your variable interest rate into a lower fixed rate, you may be able to save on borrowing costs.
On the other hand, here are some instances where you might think twice about refinancing:
You’re struggling to make your current loan payments. If you can’t make your current loan payments, you may be able to talk to your lender about your payment schedule first — before choosing to refinance. If you decide to refinance, keep in mind that although you may be able to get a more desirable interest rate and repayment term, extending the loan term means you’ll pay more interest (and more in total) over the life of the loan.
You won’t actually save money. Refinancing a business loan won’t necessarily save money. When you refinance a loan, you may face new loan fees, such as origination fees and closing costs. Your existing lender may also charge prepayment penalties if you repay your loan early, which could take away from any savings you might get by refinancing. Plus, if your business hasn’t improved its qualifications, refinancing may not be able to decrease your interest rate or lower your payments.
Find the right business loan
The best business loan is generally the one with the lowest rates and most ideal terms. But other factors — like time to fund and your business’s qualifications — can help determine which option you should choose. NerdWallet recommends comparing small-business loans to find the right fit for your business.