Guide to Refinancing Business Loans

Guide to Refinancing Business Loans

Guide to Refinancing Business Loans

For many small business owners, business loans are critical to financing company growth and development. The savviest entrepreneurs keep their eye on the market and monitor for opportunities to score better loan interest rates or find payment terms that better match company needs. 

The process of refinancing a business loan is similar to the process of initially obtaining one. You fill out an application and either get approved or declined. 

It can sometimes be a lot of work, depending on the type of loan, but the work involved is often more than worth it for small businesses that want to make smart financial choices and support progress. 

Here’s how and when to refinance a business loan. 

When to Consider Refinancing

Refinancing a loan actually means getting a new business loan that pays off one or more of your current loans. There are several reasons why a business would consider refinancing a loan. 

The most common three reasons for refinancing are: 

Lower costs. While interest rates have been rising over the past year, some business owners may be in very high cost financing arrangements and may be able to get lower rates refinancing. If you are paying high Annual Percentage Rates (APR) or fees on financing, you may want to consider refinancing to save money. 

Lower monthly payments: When you refinance, you pay off your existing balance. If you’ve been paying for a while, your current balance may be smaller than your original financing and your new loan payment may be smaller as a result. A lower Annual Percentage Rate (APR) and/or longer loan term can also lower your payments.   

Debt consolidation. Businesses trying to juggle multiple debts may want to consider consolidating multiple existing debts into one new loan to simplify payments. True debt consolidation pays off existing debt with a new loan.

Benefits of Refinancing a Small Business Loan 

A small business loan refinance can have a positive impact on a business in many ways. Some of the most meaningful effects include the following:

Reduced cost of financing: Financing cost reflects the total expenses associated with securing funds, such as interest, fees, and other charges. When a business refinances a loan with a reduced cost, it frees up money that can be used to meet other business needs.

Better cash flow: Cash flow is the heartbeat of a business. It pays for the expenses that make your business run, like rent, payroll, and inventory. Refinancing can improve cash flow by saving a company money with reduced monthly costs or by providing additional cash for other projects, so incoming cash does not need to be diverted to these expenses.  

Increased funding amounts: It’s no secret that simply having more money can sometimes make it easier for a business to grow. Refinancing a loan typically provides a company with an opportunity to borrow additional cash, which they can allocate as needed, whether that’s to fund a large investment to improve processes within the business or just to catch up on outstanding bills. 

Drawbacks of Business Loan Refinancing

Impact on credit scores: If the lender checks your personal credit, your credit score may take a small hit from any inquiries that are created. (Some small business loan applications result in soft inquiries that don’t affect personal credit.) Additionally, refinancing a loan can increase your debt, which can impact your business credit profile. 

Prepayment penalties: Depending on the lender and the type of financing, prepayment penalty fees can occur when a borrower pays its lender all or part of their loan principal before its due date. In the refinancing process, a business pays off its previous loan debt with the funds from its new loan. Sometimes, these fees are negligible compared to the savings of refinancing but it’s important to examine the exact fees for your unique loan. 

Collateral requirement: Some types of financing require collateral. And others may require a personal guarantee. Make sure you understand these terms. 

Higher costs.  If you need a loan quickly you may be tempted to take any loan, even if it gets your business further in debt. Refinancing one high-cost loan or advance with with another high-cost loan or advance will only dig the hole deeper. 

Types of Commercial Loans For Refinancing

Many types of business financing can be refinanced, or used to refinance other debt. Here are the most popular types.

Business Term Loans 

A term loan is a standard loan in which a borrower receives money from a lender and pays back the debt in increments (these could be daily, weekly, or monthly depending on your lender) over an agreed-upon timeframe. These loans can last from a number of months to 20+ years, so they may work for both short-term financing and long-term financing needs. 

Working Capital Loans

This term is often used to describe short-term loans used to fund a business’ short-term operational needs and everyday expenses. Lines of credit, short-term loans and even credit cards may be used for this purpose. They may be available from online lenders or with traditional bank loans and/or SBA loans. 

For example, a company could apply for a working capital loan if cash is needed during a slow season. Terms for working capital loans are short, so a refi might be considered if a business finds it needs a longer time frame to repay the loan. 

Equipment Loans

These loans are usually used to purchase the big-ticket equipment a business needs to operate, such as a commercial oven or a backhoe. However, any equipment used to do business can be considered equipment—even computers or a restaurant’s pizza oven. Equipment loans use the equipment itself as collateral. Often, businesses must decide whether to purchase or refinance new equipment. 

Commercial Real Estate Loans

A commercial mortgage is similar to a personal loan mortgage on a residential property. Instead, it is a mortgage secured by a lien on a commercial property. Commercial property is defined as income-producing real estate used for business purposes. (SBA 504 loan refinancing is especially popular due to the favorable terms of these loans.) 


Microloans are a unique type of business financing, often offered by non-profit and community lenders. They are short-term loans with fairly low interest rates for smaller loan amounts, generally less than $50,000. Entrepreneurs may use these loans to launch or grow an emerging business. They often carry favorable terms, so you may want to consider a microloan to pay off an existing loan at a lower rate if you qualify. 

Business Lines of Credit

Here the business gets a line of credit that it can borrow against as needed, up to the credit limit. Lines of credit are often available through online lenders as well as traditional banks and credit unions. Often business credit cards also offer a line of credit.

Business Credit Cards

Don’t overlook this popular type of small business financing. Qualifying for small business credit cards is often based on your personal credit scores and income from all sources. They are sometimes the only choice for startups that may not have other options. Business credit cards with 0% intro APRs may be helpful for short-term financing.  

How to Qualify for Refinancing

The qualifications for refinancing a loan are similar to obtaining a new loan. Refinancing qualifications commonly include factors such as: 

Income: Lenders need to know that you have sufficient cash coming in so you’ll be able to make your periodic payments. Most small business financing requires proof of business revenues in the form of business bank statements, or by linking to your business checking account to review that information. 

Credit: If you are seeking a loan with more favorable rates and repayment terms, make sure your credit profile is at least the same or better than when you originally applied. Lenders may look at your business credit score and/or personal credit, including credit scores. They may also review payment history, how long you’ve been using credit, and what kind of credit have you used (e.g., credit cards, cash advances, vendor terms etc.) They may also carefully scrutinize whether you’ve recently obtained other credit. 

Debt ratios. Lenders don’t want to finance a loan that isn’t likely to be repaid. In addition to credit history, they may look at your business debt service coverage ratio, credit utilization, or other similar factors to determine whether they believe your business will be able to repay the new debt. 

Equity. Some lenders will require a down payment or will want to make sure you have sufficient equity in your business. 

Time in business. It is easier to get small business financing if you have been in business for at least a year, and two years or more is preferable. 

UCC filings. These indicate a creditor has a lien on property your business owns. Too many UCC filings may be a cause to decline your loan application. Check your business credit reports as it is not uncommon for this information to be out of date. 

When Is It Time to Refinance?

You may want to consider refinancing your small business debt when: 

Your credit has improved. If your business credit scores and/or personal credit scores have risen, you may be eligible for financing at more favorable terms. 

Business revenues have increased. Many types of small business financing take business income into account for qualification purposes. Higher monthly or annual revenues may mean you can get a better loan. 

You’re facing a balloon payment. If you have a loan with a balloon payment coming up— a lump sum that will be due— and you can’t or don’t want to pay that full amount, refinancing may offer an alternative if you qualify. 

Rates keep changing. If you have a variable-rate business loan then you’re likely aware that interest rates have been rising. A fixed rate can give your business more predictable costs and payments than an original loan with a variable rate APR.  

You want a better repayment schedule: Refinancing may help you get a loan with repayment terms and fees that might work more favorably for your business. By refinancing, you may be able to make payments less frequently. For example you may be able to pay off financing that carries daily or weekly payments with a loan that offers monthly payments. 

How to Refinance A Business Loan

If you want to refinance your current business financing, you’ll need to find a new lender, apply and then pay off the existing financing with the new financing.

Determine how much you owe: Take a look at your statements and figure out how much you currently owe on your business loan or financing. Request a payoff amount if you don’t have it. With this knowledge, you’ll be able to calculate exactly what you need to make your refi advantageous. It will also help you shop around online, as loan calculators generally require this dollar figure. 

Gather application documents: This can be one of the most tedious parts of applying for any loan, so it’s best to start early to guarantee you have what you need. Most business loan applications require documents such as your EIN, business bank statements, and basic details about your business. Traditional loans (like bank loans or SBA guaranteed loans) may also require recent tax returns, legal entity documents, balance sheets, profit and loss statements, or even business plans. 

Research and compare lenders: Shopping for an opportunity to refinance online is an incredibly simple process. Nav can help you easily compare lenders based on your business qualifications. If you prefer to work face-to-face, you can talk to your local bank or credit union for more information on business lending options. 

Pay special attention to fees associated with closing costs and other origination fees when you are reviewing refinancing options, as these upfront fees can be costly for a cash-strapped small business. 

Refinancing vs Loan Stacking

Loan stacking usually involves taking out multiple loans in a short period of time, with the goal of obtaining a larger amount of financing. The loans are “stacked” to get the total amount of capital needed. 

With loan stacking you typically don’t pay off one loan with another, but rather you use multiple lenders. This means you’ll have more payments to manage. It can lead to a situation where the business owner can’t keep up with all the payments, and the business spirals into a worse financial situation. 

Final Word: Refinancing Business Loans 

Refinancing a business loan can be a smart move if a company can score a significantly lower interest rate, lower fees, or loan repayment terms that work better for its unique situation. 

As with any financial commitment, it’s important to ensure the costs associated with refinancing a loan do not outweigh the benefits. If your business needs cash, but the timing isn’t right to refinance business loans, consider other business financing options.

FAQs about Small Business Loan Refinance

This article was originally written on February 10, 2020 and updated on February 27, 2023.

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One response to “Guide to Refinancing Business Loans

  1. Wow, a very good article. That (refinancing) is exactly what I have been searching. Thank you so much.