Operating a business is challenging enough without having your cash flow cramped by huge loan payments. If paying your lender is becoming a struggle, refinancing your small business loan may bring welcome relief.
There are many good reasons to refinance a small-business loan, provided you're a good candidate. The major appeal generally is a reduced interest rate, which can result in significantly lower monthly payments. But this isn't the only potential benefit. Refinancing also may give you the opportunity to get additional cash out to help with company expansion and new expenses. It also could let you extend or improve loan terms or dodge a massive upcoming balloon payment.
Is refinancing right for my business?
As tempting as small-business refinancing sounds, it's not for everyone. Refinancing may be a good choice for your business if:
- Rates have come down at least one point since you originally financed: Do the math to ensure your payment will go down enough to put you ahead after closing costs and fees.
- Prepayment penalties won't derail you: Expensive prepayment penalties for your current loan could defeat the whole purpose of refinancing.
- You plan to keep your business long term: It takes time to recoup refinancing expenses like points and fees.
- Your current payments are mostly interest: Early in a loan, you've barely begun chipping away at your balance. Refinancing at a lower rate during this time really cuts a chunk from your overall interest burden. By the time you're paying mostly principal, the savings won't be as substantial.
- You have equity: While you don't want to wait too long to refinance, having built some equity in your business helps you qualify for lower interest rates.
- You have good credit: To qualify for attractive annual percentage rates, you need solid credit.
- You're unhappy with your current loan: You may be suffering from exceptionally high rates, a looming balloon payment, oppressive late fees or other terms and conditions that are dragging your business down.
- Your business is eligible for SBA refinancing: While you have lots of refinancing choices, the Small Business Administration offers some of the best rates and terms. It refinances loans from other lenders and even its own older loans under certain conditions: Your business must be SBA-eligible; the current debt terms must be unreasonable; the current creditor must not be at risk for loss; and your business must stand to truly benefit from the refinance.
How can I refinance my small business loan?
If you're considering a refinance, start by exploring all the new types of small-business loans available through respectable, responsible lenders. Compare rates and terms carefully to make sure moving ahead is cost-effective. Some important questions to ask include:
- Is collateral required?
- What is the APR and how much will my payment go down?
- What closing costs and fees are involved?
- How long will I have to repay this loan?
- Do prepayment penalties or late fees apply?
Once you've determined that refinancing is worthwhile and chosen a loan option, the application process will be much like that of your original financing. Expect a credit check and evaluation of your income, business history and business plan. As soon as you're approved, you'll be on your way toward a lasting improvement in your business's cash flow and financial health.
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