How To Refinance A Small Business Loan

The first loan you took out for your small business probably doesn’t have the best terms and rates. Since most startups have zero credit history or experience in the field, they have limited options for loans. 

After some time spent paying for your debt that’s too expensive, you might find yourself wishing for a better loan option. Fortunately, you can. Depending on how long you’ve been paying for your initial loan and how your business has changed, you should have a wider range of business funding solutions. 

So, if you’re thinking about refinancing your small business loan, this article should help you get started. 

Understanding Loan Refinancing

Refinancing a small business loan simply means taking out a new loan, which you can use to pay off your previously-held debt. Then, you make payments on the new loan going forward. 

In general, small business owners use this method to replace expensive, short-term loans. With lower costs and longer-term loan products. Ideally, the new loan has more favorable terms, including:

• Less frequent payments

• Lower annual percentage rate (APR)

• Lower monthly payments

In addition, you can work with a different lender, refinance using a different kind of loan product, or even refinance multiple loans at the same time into a single new loan. If you have a business in Australia, you can consult companies such as commercialloans.com.au that can provide you with competitive refinancing options. 

Is It A Smart Move?

Whether or not refinancing makes sense depends on every small business owner. If refinancing means you can save significant money on interest without triggering the prepayment fee from your original lender, then it’s a no-brainer. However, if you’re only getting a marginally lower monthly payment or rate, then refinancing may not be a good idea. Working with a small business attorney can help you navigate the complexities of loan refinancing and ensure that you make the best decision for your business. 

In general, you should consider various factors to determine whether or not refinancing is a smart move. These include:

• Your goal for getting a new loan

• Business financial and credit profile

• Cost of refinancing, including all fees, such as underwriting

• The loan terms and rate you’ll qualify for

• Any personal guarantee or collateral requirement from the lender

Watch Out For Penalties

When taking out a loan for the first time, you need to read all of the fine print and understand the process for paying it off. This is critical if you’re trying to get out of a bad loan. 

Some lenders can penalize you for paying off your loan ahead of schedule. This is because they’ll be losing out on the interest they expected to accrue throughout your current loan’s lifetime. So, before refinancing, make sure that you check whether or not your current loan has any prepayment penalty and how much it will cost you. If the penalty outweighs what you’ll save in refinancing, then it certainly isn’t worth it. 

Explore Your Refinancing Options

If you think refinancing is a smart move, then you need to do your homework and find the right refinancing options for you. 

• Bank Loans

Most banks offer small business loan financing. However, they have more strict qualifications for refinancing loans. In general, they may offer lower interest rates, better long-term solutions, and higher refinancing amounts. They’re suitable for businesses with strong credit histories or ratings. However, they may take longer than other kinds of business refinancing loan options. 

• Alternative Lenders

These are non-bank entities offering small business refinancing loans, including those who don’t qualify for loans at traditional banks, such as online lenders, offering various loan products to serve individuals and small business owners. 

Unlike banking institutions, alternative lenders offer faster approval and financing. They also have lower or fewer qualification requirements. However, they do have higher interest rates, depending on your creditworthiness. 

Qualifying For A Small Business Refinancing Loan

Small business loans aren’t the same. And, qualifying for a refinancing loan can vary from one lender to another— either banks or alternative lenders. 

Also, you want to take note that there are actually a few types of business debt that can’t be refinanced. So, you might want to consult with the lender if you’re eligible for refinancing. Explore the what are 504 loans.