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 (often shortened to “refi”) 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 are the steps to a business loan refinance, when and how to refi business loans, and the steps to refinancing business loans.
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What does refinancing a business loan mean?
A business loan refinance involves replacing an existing loan with a new one, typically to take advantage of better terms, lower interest rates, or to modify the loan structure to better suit the needs of the business.
Here’s a breakdown of why most people refinance a business loan:
- Lower interest rates: One common reason for refinancing is to get a lower interest rate. If market conditions have changed, or if your business creditworthiness has improved since you took out the original loan, you may be eligible for more favorable terms.
- Improved loan terms: Refinancing allows businesses to try to negotiate better loan terms, such as longer repayment periods, smaller monthly payments, or more flexible repayment structures. This can help improve the business’s cash flow and financial stability.
- Debt consolidation: If a business has multiple loans or debts, refinancing can be used to consolidate them into a single loan. This can simplify financial management and potentially reduce overall interest payments.
- Change in loan type: Businesses may choose to switch from a variable-rate loan to a fixed-rate loan or vice versa. This decision depends on the current economic conditions, interest rate expectations, and the business’s risk tolerance.
- Access to equity: Some businesses use refinancing as a way to access equity tied up in their assets. This is often done through a cash-out refinance, where the new loan amount is higher than the remaining balance on the existing loan, and the difference is provided to the business as cash.
- Financial restructuring: Refinancing can be part of a broader financial restructuring strategy. For example, if a business is facing financial challenges, it may renegotiate loan terms to extend the repayment period or reduce monthly payments.
It’s important to carefully evaluate the costs and benefits of a refi business loan, considering fees, closing costs, and the impact on the overall financial health of the business. Additionally, businesses should assess whether they meet the eligibility criteria for refinancing and whether the potential benefits outweigh the associated costs.
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.
Should you refinance a business loan?
Whether to refinance a business loan depends on several factors, like current interest rates, the financial health of your business, and the terms of the existing loan.
If market conditions or your business’s creditworthiness have improved, refinancing might offer a chance for lower interest rates and improved loan terms, potentially reducing monthly payments and enhancing cash flow.
Additionally, businesses may consider refinancing to consolidate debts, tap into equity, or strategically restructure their finances. However, it’s best to carefully look at the associated costs, eligibility criteria, and overall impact on the business’s financial well-being before deciding to refinance. Consulting with financial experts can offer valuable guidance tailored to your business needs.
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.
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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.
What are the steps to refinance my existing business loan?
Refinancing a business loan involves several steps to ensure a smooth transition and favorable terms.
Here’s a general guide for the steps to refinance business loans:
- Evaluate your current loan: Look at the terms of your existing loan, including interest rates, repayment terms, and any associated fees. Make sure you understand the reasons for wanting to refinance, like getting better terms, reducing monthly payments, or accessing equity.
- Check your creditworthiness: Review your business credit scores and reports, as well as overall financial health. A strong credit profile increases the likelihood of securing favorable refinancing terms. Take steps to improve your credit if needed.
- Research lenders: Explore potential lenders and financial institutions offering business loan refinancing. Compare interest rates, fees, and terms to find the most competitive options. Using Nav is the simplest way to compare lenders using your specific business data.
- Gather financial documents: Prepare necessary documents, like income statements, balance sheets, tax returns, and other relevant information. Lenders will use these to assess your eligibility and determine the terms of the new loan.
- Calculate the costs: Evaluate the costs associated with refinancing, including application fees, closing costs, and any prepayment penalties from your existing loan. Make sure that the potential benefits outweigh these expenses.
- Submit loan application: Complete the application process with the chosen lender. Be prepared to provide detailed information about your business and its financial performance.
- Go through underwriting: Once you submit the application, the lender will conduct a thorough underwriting process. They’ll review your financial documents, credit history, and business performance, which helps them determine the risk and terms of the new loan.
- Receive loan approval: If your application is successful, the lender will give you a loan offer, including the terms and conditions of the refinanced loan. Review these carefully and ensure they align with your financial goals.
- Close the loan: If you accept the loan offer, you’ll move to the closing phase. This involves signing the necessary paperwork, paying any closing costs, and officially completing the refinancing process. The new loan proceeds will be used to pay off the existing loan.
- Monitor your finances: After refinancing, monitor your business finances closely. Take advantage of the improved terms to enhance cash flow or pursue strategic initiatives. Stay in communication with your lender and address any issues promptly.
Remember that you can back out of the loan process any time before you sign the closing documents if you realize that the cost or terms won’t work for you.
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
Small business loans can be term loans. 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.
Intermediate-Term Loan by Kapitus
Great for established businesses looking for large capital amounts.
Pros
- Repayment term of 2-6 years for those who qualify
- Favorable payment plans for businesses with $250k+ annual revenue
- Specialty loan programs for medical practices.
Cons
- Some repayment structures require weekly payments
- Favorable terms for 3+ years time in business.
Funding Amount
Cost
Repayment Terms
Funding Speed
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.
Short-Term Loan by Credibly
As quickly as 4 hours
Pros
- Set payments
- Pre-qualification, which means you can pre-qualify without hurting your credit
- With strong cashflow health, low personal credit scores still have great options here
Cons
- Must have at least $15,000 a month in deposits
- Repayment terms maybe shorter for some users
Funding Amount
Cost
Repayment Terms
Funding Speed
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
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.
Line of Credit by Headway Capital
Headway Capital provides businesses with a true revolving Line of Credit with no pre-payment penalties, one fixed monthly payment, and the ability to access additional capital any time you have funds available. Bonus: When you click 'Apply now," we'll securely pass over your info, making applying with Headway a breeze. Only answer a few additional questions on their end and you're good to go.
Pros
- Pre-approval process does not require hard personal credit inquiry
- Approval within hours of applying
- Only pay interest on what you use
- Offers 24-month repayment terms and monthly payments.
Cons
- Interest rates can be higher than some other line of credit providers
- Hard personal credit inquiry at the time of funding.
Funding Amount
Cost
Repayment Terms
Funding Speed
Line of Credit by Fundbox
Nav recommends this product as a great solution for newer small businesses looking for a fast application process and access to a flexible LOC product. Bonus: When you click 'Apply now," we'll securely pass over your info, making applying with Fundbox a breeze. Only answer a few additional questions on their end and you're good to go.
Pros
- 625 minimum personal credit score
- No impact to credit score to apply (soft pull only)
- No draw fees
- Fast approval and funding, with funds available as soon as the next business day
- Use as much as you need, only pay interest on what you use
- Fundbox reports payment activity to all the major commercial credit bureaus via the Small Business Financial Exchange (SBFE), which can help strengthen a business's credit profile.
Cons
- Must have a business checking account with a minimum balance of $500
- May require large weekly payments (0.4% - 0.7% of the original draw amount per week) due to the short repayment duration.
Funding Amount
Cost
Repayment Terms
Funding Speed
Business credit cards
Don’t overlook business credit cards as a 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.
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Business credit cards can help you when your business needs access to cash right away. Browse your top business credit card options and apply in minutes.
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.
Don’t try to hide existing financing from the new lender. Not disclosing financing during the application process may get you turned down for that loan you really want.
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.
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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.
Compare your financing options with confidence
Know what business financing you can qualify for before you apply — instantly compare your best financial options based on your unique business data.
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.
Up-to-date business bookkeeping allows you or your accounting professional can run financial statements if needed. Find the best business accounting software here.
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.
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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.
Can you renegotiate a business loan?
Yes, you can potentially renegotiate a loan even after everything is signed — and it’s much better to work with the lender rather than paying late or not paying at all.
Lenders are often willing to work with business owners who realize they can’t make their current payments. They may be able to offer a lower interest rate or a longer repayment period to lower your monthly payments. This can help you afford your monthly loan payments. If you fail to pay your loan, your credit can take a big hit, so it’s a smart move to contact the lender to see what they can do.
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.
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Frequently asked questions
How long do you have to wait to refinance a commercial loan?
Some loans may have prepayment penalties that could be expensive. Review your loan documents or check with your lender to see whether that’s the case, and whether it makes sense to wait to refinance or pay the fee.
Can SBA loans be used to refinance debt?
Most SBA loans can be used to refinance other debt, provided the new loan puts the business in a better financial position. Most SBA loans are made by financial institutions and guaranteed by the US Small Business Administration. Talk to your lender to find out whether you can use an SBA loan to refinance existing debt.
When can you refinance an SBA loan?
The most popular SBA loans, such as SBA 7(a) loans do not carry prepayment penalties . However, SBA loans usually carry excellent terms so make sure any new loan option you are considering will be cheaper than your SBA loan.
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Gerri Detweiler
Education Consultant, Nav
Gerri Detweiler, a financing and credit expert, has been featured in 4,500+ news stories and answered 10,000+ credit and lending questions online. In addition to Nav, her articles have appeared on Forbes, MarketWatch, and Startup Nation. She is the author or co-author of six books, including Finance Your Own Business, and she has also testified before Congress on consumer credit legislation.