When you have your own business - whether it’s in the start-up phase or you’re a seasoned entrepreneur – cash flow isn’t always a constant. Sometimes you need to pay for unexpected expenses, make payroll, or fund new equipment. If you don’t have the cash on hand to cover those things, you might need a business loan.
For many small business owners, business loans are key to company growth and development. It’s smart to keep an eye on the market and look for opportunities to secure better loan interest rates or find more favorable payment terms. The process of refinancing a business loan can lead to a time commitment, lots of paperwork, and may require a strong credit score. However, a refinance can be a smart financial choice to put your business in a stronger position to move forward. Here’s some information you should consider:
Loan consolidation vs. loan refinancing
Consolidating and refinancing are two different approaches to restructuring your business loans, even though you may hear the two terms used interchangeably. Each has a different strategy to manage debt. Here’s a basic definition of each:
Loan consolidation: The concept of consolidation is bundling separate loans together so you can handle them with one payment. It’s a good way to simplify your monthly obligations but it 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 financial situation. Refinancing is by far the better way to save money.
The benefits of refinancing business debt
No matter which debt consolidation strategy you might use, if the new loan helps you better manage cash flow and decreases the amount of interest you pay each month, it’s probably a good business decision.
Though getting a new loan involves applying, supplying financial paperwork, and having a strong credit score, it can have definite advantages like:
- Terms for payback can be shortened
- Interest rates are likely to decrease
- Cash flow may be stabilized
- Debt may be paid down quicker
- Money saved can be used to expand your business so you can hire and pay yourself and your employees more
How business loan refinancing works
Business debt refinancing involves replacing an existing loan with a new loan that has more favorable terms so that you ultimately save money over the life of the loan. The way it works is the money from the new loan is directed toward repaying your old loan (or loans) and you can focus on repaying a single lender. Strong options to refinance expensive debt include an SBA loan or a bank term loan.
Here are 7 steps you can take to improve the finances of your business.
Before you jump into a new loan, consider these seven steps. Answering a few questions and looking at your cash flow and debt obligations can help guide you as you search for the right loan to support your business.
Not all entrepreneurs are financial wizards! Don’t hesitate to reach out to your accountant or another financial professional to help you make the decision. If you don’t have an accountant and need one, check out this blog post from the SmartBiz Loans® Small Business Blog:
How to Hire an Accountant for a Small Business to help you on your search for one.
- Determine whether you're in a situation to refinance
It’s important to get a handle on your debts so you know where you stand. Here are some points to consider:
- How much money you need to payoff current loans
- Your total amount of loan payments each month
- The interest rate of each loan
- The number of months remaining on each loan
- Payment frequency
- Penalties for early loan payoff
Time to get out a calculator and crunch the numbers. You’ll quickly discover if a refinance is worth your time and effort.
- Determine the refinancing goal
Now that you’ve determined your financial situation, nail down why you want to refinance one or more loans and consider the benefits you’ll gain. Do you want to reduce your monthly payments or lower the total cost of your loan? It’s crucial to establish which goals you’re after before you kick off the process.
- Put together a list of existing debts
The business debts most often refinanced are high-interest loans with daily or weekly repayment schedules. These loans often include merchant cash advances, short-term loans, and business credit cards. Put together a list of all the loans you’d like to refinance.
- Review the financial details
The goal of a refinance is to bring the cost down. Do your homework on all the different components of a possible refinanced loan including the interest rate, closing costs, and the loan term.
- Consider the lender options and pick the right one
These days, there are multiple traditional lenders and alternative finance companies competing for your business. But thanks to the internet, it’s easier than ever to vet the companies you’re considering. Thoroughly research your options, and consider the following:
- Check out all rates, fees, and penalties for prepayment on the lenders website
- Research reviews from real customers. Google Reviews, TrustPilot, The Better Business Bureau (BBB), and Consumer Affairs are good review platforms to explore
- Determine if personalized customer service is available via an online chat or phone call to help you explore your options and explain all costs and fees
- Ask how long the application process will take and time to funding
Remember that fast money isn’t cheap money. If you choose a lender based on speed only, it may do more harm than good.
- Use an SBA loan as part of refinancing
SBA loans available for debt refinance have low rates, a 10-year term, and low monthly payments that won’t cut into your cash flow.
Here are a few more reasons an SBA loan is an excellent option for refinancing expensive debt:
- Can help build business credit
- No prepayment penalty
- Long terms mean very low monthly payments
- Available nationwide
Additionally, funds from an SBA loan can be used in a variety of ways. If you have funds leftover after refinancing your loans you can use the money for working capital, equipment purchases, additional inventory, hiring, marketing, and more.
- Apply to lenders
Once you’ve decided that a loan refinance is the right choice for your business and you’ve settled on a lender to work with, it’s time to get prepared. The first step is to make sure you meet the eligibility requirements.
Requirements will vary from lender to lender, but they will likely be similar. These are the eligibility requirements to apply for a $30,000 to $350,000 SBA 7(a) working capital or debt refinance loan from banks that participate in the SmartBiz marketplace:
- Time in business must be above 2 years
- Business owner’s personal credit score must be above 650
- The business must be U.S. based and owned by U.S. citizen or Lawful Permanent Resident who is at least 21 years old
- No outstanding tax liens
- No bankruptcies or foreclosures in the past 3 years
- No recent charge-offs or settlements
- Current on government-related loans
Next, get organized and ready to submit the paperwork required to complete the loan application. Here are documents commonly required to apply for a debt refinance loan:
- Business financials (past two years)
- Profit and loss statement (past two years and year-to-date)
- Projected financials (looking forward one to three years)
- Ownership information
- All business licenses
- All business leases
- Loan application history
- Business tax returns (past two years)
- Personal tax returns (past two years)
Final thoughts
The small business finance landscape can be intimidating, especially in the early days of entrepreneurship, when loan options are generally limited and costly. But once you’ve made it through the start-up stage and built up your credit history, your loan options will expand.
Following the steps outlined here, you’ll be able to successfully identify and obtain the refinancing option that will be the best fit for your unique business needs.
