As a small business owner, you’ve probably taken out a loan in the past to help in the growth of your business. While small business loans can help in boosting your business, the repayment obligations can be strenuous. This is especially true if your business is not growing at the pace you expected. Instead of struggling to repay your small business loan, consider refinancing your current business loan, as a way to achieve your business goals faster. Loan refinancing happens when you secure a new loan, with more favorable terms, to offset the current one. However, you must first ensure that your business is eligible for a business loan to refinance.
Do I Qualify for a Refinance Business Loan?
Most banks and financial institutions will carefully evaluate your current business loan before considering you for refinancing. Some crucial factors to look out for before approaching a financial institution for loan refinancing are:
- Credit Score: Most financial lenders consider your credit score a vital aspect for your loan eligibility. When applying for a refinance business loan, you should ensure that your credit score is higher than when you applied for your current loan.
- Two Years Old Rule: Most lenders are reluctant to partner with businesses that are less than two years old. But, after a business has been operational for more than two years, its eligibility for refinancing business loan increases. If your business has reached the two-year mark, you have a good chance of getting a refinancing loan.
- Financial milestone: Your business is likely to be considered for refinancing if it has experienced a significant financial milestone, such as an increase in annual revenue.
A refinance business loan poses a big responsibility; thus it is important to check your current financial situation before applying for one.
What to Consider Before Refinancing the Loan
Before jumping into the process of refinancing your business loan, there are several considerations you should make to determine whether the action is viable. These include:
- What is your refinancing goal and can it be achieved in any other way
- What are your current business debts and what has caused them?
- What are your current business finances and do they exceed the debts?
- What are the available refinancing options?
- Are the available options worth applying for and why?
After asking yourself these questions, you will have decided on whether your business needs a refinancing loan. After making an individual decision, you should consult a few employees and stakeholders to hear their views after which you can proceed to secure the loan.
How to Get a Refinance Business Loan
For most small businesses, acquiring a loan or even refinancing one has proved difficult because of the high interest rates from the banks. But, the government through the (Small Business Administration) SBA loans, has made it possible for many small businesses to get loan refinancing at favorable rates.
The SBA loans reduce the lender’s risks by promising to pay up to 75 % of the loan should the business default in the loan repayment. Furthermore, the SBA allows for loan forgiveness, in special cases, such as when a business is unable to meet their debt obligation. As such, the SBA loan is by far the most suitable type of loan for any kind of business.
Whether you are applying for the SBA loan refinancing or a Commercial bridge loan, it is important to ensure that you meet the lender’s requirements. For instance, for your business to be eligible for an SBA loan, it must meet the SBA eligibility requirements. Additionally, your business must prove that it is not able to raise the required capital. The business must also fit the government’s definition of a small business in its given industry.
Benefits of Refinance Business Loan
Refinance business loan involves adopting a more suitable financial arrangement for your business. Depending on your business circumstance, your refinancing may require either of the following:
- Combining multiple debts into a single loan facility
- Changing the regular installments amount
- Opting for different lenders but retaining the same finance products
- Changing the type of collateral offered for the loan
Benefits of Refinancing Your Current Loan
- Lower rates: Many businesses struggle to repay loans because of high interest rates. A loan with lower interest rates will enable you to service your current loan more as well as have extra funds to reinvest back into your business.
- Reduced loan Repayments: You can now select lower loan repayments package that will not become a future financial burden for your business.
- Fixed rate: If you are on a variable rate loan repayment plan, you may consider switching to a fixed rate. A fixed rate loan plan is better as it enables you to plan your financial obligations.
- Increased cash flow: A refinanced loan will allow you to have lower repayments amounts which will, in turn, increase your day to day cash flow to run your business more efficiently.
- Easy debt management: In case you had many debts, you can now be able to manage your loan better by consolidating it into one financial product.
- Accessing Equity: By refinancing your business loan, you are eligible to access the equity that you have built in your business over time and use it in further into the expansion of your business.
- Security on Personal items: Most people put up their personal assets as security when applying for their first business loan. When refinancing your loan, you can have your personal assets released and instead offer the business assets as collateral.
- Flexible loan features: When looking to refinance your loan, you can select a flexible financial package compatible with your business.
Drawbacks of Refinancing Your Current Loan
- Good credit: It might be challenging to get an ideal loan package as your business is required to provide excellent financial credit.
- Cost of refinancing: In most cases, you may incur certain fees or charges for refinancing a new loan.
- Additionally, you may incur further charges when setting up a new financial plan with a new lender or institution.
As a small business owner, it is important to make sound financial decisions even as you focus on the growth of your business. With strategies such as equipment finance, business loan can play a vital role in the growth and development of your business. Nonetheless, there a few a common misconceptions associated with loans, such as, lower interest rates translate to more savings, which is not the case.
Each business has different financial capacities, hence may require differing loan packages. As such, when considering refinancing your business loan, you should be careful to select a loan package that is most suitable for your business. Mostly, you should ensure that the loan you choose will help you achieve your business objectives.