In the wake of the pandemic, many small business owners are looking for ways to increase cash flow and decrease debt obligations. Refinancing an expensive loan is a great way to reach these goals. Make sure you go into the process knowing the risks and rewards. Here’s information to consider when you’re exploring solutions to your existing business debt.
Loan refinance vs. loan consolidation
Although consolidation and refinancing may sound like the same thing, they are different. Each has a different strategy to manage debt.
Loan consolidation: The concept of consolidation is bundling separate loans together so you can handle with one payment. It’s a good way to simplify your monthly obligations but doesn’t necessarily save you money.
Refinancing: This strategy is replacing one or more loans with an entirely new loan, ideally one with better rates and terms. The new loan will pay off the expensive loan, leaving you in a better situation. Refinancing is by far the better way to save money.
Reasons to get a lower-cost loan for consolidation
Here are reasons a consolidation might be a good fit for your unique business:
- Less frequent payments
- Smaller payments
- Longer terms
- Lower APR
Is it the right time to refinance business debt?
Ask yourself the following important questions:
- Are the terms of your current loan competitive? Check out alternative lenders, banks, and credit unions to find the lowest interest rates with the best terms.
- How much interest is left to pay on your current loan? If you're getting close to the end of an amortized loan (where interest is in early payments, principal the later ones) refinancing may not be the best answer. Towards the end of a loan, the interest rate may be high, but most dollars are going towards the loan's principal.
- What are the costs of getting a new loan? Fees can wipe out any savings you'll get from refinancing, so it's time to get out a calculator. Larger loans cost more. If you plan on using real estate as collateral for your loan, you'll also need to factor in an appraisal, which can be costly.
It is also worth mentioning that there are debt refinancing offers that sound too good to be true. And it's typically because they are. Debt cannot simply disappear. Companies that offer to consolidate all your loans and sell them may be making an impossible promise. Before you refinance your loans, make sure you know the background of the lending institution and investigate exactly how its debt-refinancing plan works. Avoid scam artists who can lead you into an unrealistic - and costly - debt elimination program. Consider an SBA loan if you are qualified.
Are you eligible for debt refinancing? Questions to ask.
Before you jump into the process, determine if you’re qualified for a money-saving solution.
- Are you in the best possible loan you could be currently?
- What type of business debt do you have?
- What is your current outstanding balance?
- What is your current required monthly loan payment?
- What is the projected date you will pay off this debt?
- Have you declared bankruptcy?
- Do you have a tax lien on any assets?
- Is your business financially healthy?
- What’s your credit score? (This is crucial information to know. Strong credit scores are generally required to get a low-cost loan. Visit the SmartBiz Small Business Blog for credit score information: What You Need to Know About Credit Scores.)
Pros of refinancing business debt
There are lots of advantages to a debt refinance with a lower rate loan.
Debt refinancing can offer lower rates
A rate refinance can help you divert more money toward your debt without changing your principal balance. This can help you better manage your finances and pay down debt.
Debt refinancing can offer longer terms
Longer terms equal small payments. This can reduce your monthly debt obligations, strengthening cash flow.
Debt refinancing can offer more money
If qualified, you can get a loan larger than the debt you’re refinancing. That extra money can go towards a multitude of business building initiatives like purchasing inventory or increasing marketing.
Cons of refinancing business debt
There are a few negatives that come with a debt refinance:
If you want to pay off your debt early, you might find that prepayment penalties cancel out the benefits of the loan.
Refinancing short-term debt with short-term debt can get expensive
Make sure you a very clear on the rates, terms, and prepayment penalties when considering a refinance. This is when it’s important to work with a lender who has excellent customer service.
How to refinance a business debt
Here are steps to take to ensure that you have a smooth and effective experience.
Determine how much you owe
Review your current loan balance and interest rate to get a handle on how much you owe and how much you would need to borrow to effectively pay down your expensive debt.
Gather required paperwork
Although document requirement may vary from lender to lender, be prepared to submit information on the following:
- Credit history
- Business plan (Note: The banks in the SmartBiz Loans network do not require a business plan)
- Balance sheet
- Cash flow history and projections
- Accounts payable
Research and compare lenders
You can apply for a refinance loan from the same lender who financed your original loan or find a new financial institution. Compare loan terms, fees, interest rates, and repayment schedules across various lenders.
Why is an SBA loan the right refinancing option?
SBA loans have some of the lowest interest rates and longest repayment terms. However, refinancing business debt isn’t a decision you should take lightly. To maintain the financial health of your small business, do your homework and be sure to work with a reputable lender.
Visit the SmartBiz Loans website for comprehensive information on SBA 7(a) loans: SBA Loans – The Gold Standard in Small Business Financing.