Whether you’re managing a short-term cash flow emergency or covering startup expenses in the early stages of your business, chances are you took on debt for your small company. In addition, the loan you obtained did not come with your ideal terms and rates.
The reasons vary from one business to another: you may have lacked time to shop around for better refinancing options. You may have also faced limited options due to your credit history or your business’s age.
No matter the circumstance, it’s no surprise that after some time of spending on a loan that is too frequent, expensive or both, you want a better loan for your business. Fortunately – depending on how long it has been since you took out your initial loan – your business has changed and grown, giving you more access to more business financing possibilities.
Plus, with more time to shop around for the right loan, you can still refinance your existing small business loan with a product that guarantees better terms and rates.
If you’re considering refinancing a loan for your business but are unsure of where to start, here are steps to follow, factors to consider and tips on how to go about the loan refinancing process.
Understand How Refinancing Works
When you refinance a loan for your business, you’re taking out a new loan and using the capital you gain from that loan to pay off your previous debts. In most cases, business owners turn to loan refinancing to lower the cost of loan products (e.g. SBA loans or multi-year term loans) or replace short-term loans that are costly with a longer term.
A rule of thumb in refinancing: the new loan should offer better terms and rates than your previous loan.
When refinancing your loan, you have the option to refinance using a different loan product, work with a different lender or refinance multiple debt forms at the same time into a single loan (also known as debt consolidation).
Is Refinancing a Loan Wise for Your Business?
Before you refinance your business loan, evaluate your current financial situation to determine whether refinancing your loan is the best for your business.
In general, most lenders focus on your business’s age, your personal credit score and your business’s annual revenue. When you achieve a financial milestone (for instance, you hit $200,000 in your annual revenue), consider refinancing your business loan with a better product.
Even if your business hasn’t achieved a marked improvement, you may still have other reasons for refinancing a loan. As mentioned above, you may be looking for better alternatives to ease your cash flow or want to shop around for better terms. Any of these are good reasons to refinance your business loan; however, some financial situations pose higher risks compared to others.
Will Penalties be Involved?
When you’re refinancing a loan for your business, you’re paying the loan ahead of time. Initially, it’s a good idea (and it is), but some lending companies may penalize you for paying loans ahead of time. This is because they will lose out on the interest they expected your loan to gain throughout its life.
So, before you refinance your loan, check whether your loan product comes with prepayment penalties and how much they’ll cost. If the penalty outweighs your savings, the loan is not worth it.
Explore Your Options Before You Apply
Once you’ve evaluated your business’s finances and determined your financial goals, narrow down the products you think are suitable for your business. Identify the lenders that fit your standards before you compile and submit your application.
At this point, consider working with a professional to assist you in the application process. The refinancing process can be quite involved. So, make sure you’re ready for the process.
Review Your Offers and Refinance Your Business Loan
Depending on the lending marketplace or the lender you work with, you’ll hopefully receive multiple offers from the lenders you choose. As you compare your offers, keep your financial goals in mind. This ensures that you stay focused on what you need.
Once you’ve made a decision, sign the contract, pay off your previous debts and breathe a sigh of relief. You’ve finished your loan refinancing process and are on your way to a more secure future for your business.
The world of loan refinancing can be intimidating, especially if you’re just starting your business. The loan options can be costly and limited. But once you’ve made it through your first year and built your credit history, you will have a drastically expanded variety of loan options. So before you become the prime serial entrepreneur example, straighten out your finances with the right loan first.