Refinancing your business loans can be a smart financial move, but there are some instances and conditions where it may not be. Here are five elements to consider before you approach potential lenders.
Perhaps the original terms of your business loan might have worked well for you when you took out the loan, but you're in a better financial position now. Or, maybe you had to apply for a business loan with less-favorable terms due to how quickly you needed access to capital.
No matter your reason, the idea of refinancing business loans and landing a more manageable payment plan is thrilling to most business owners.
If you're considering refinancing, it's important to make sure you understand the details before you sign on the dotted line.
What does it mean to refinance your business loans?
When you look into refinancing, your general goal is to make your debt less expensive or easier to manage. That can mean a better APR, a longer repayment period, or lower payments, whatever it is that makes the loan better for you.
With refinancing, you'll pay off your original loan in a lump sum and take on one with more favorable terms.
Why would you refinance?
Simply, to get a better business loan for you. No lender ever wants you to drown in debt – they make their money from you repaying your loan, not from defaulting – so getting more manageable terms could benefit both parties involved, especially if it means you are more likely to make your payments on time.
You also may want to refinance to consolidate your debt. If you have multiple sources dragging you down, consolidating your loan into a single source of debt through refinancing can make your debt more manageable.
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Important things to know before you attempt to refinance
Think you're ready to refinance? Before you go forward, make sure you know the following:
1. Not all lenders allow refinancing
Before you go into the process of applying for a better loan, make sure that the terms of your original business loan include the ability to refinance. Not every lender permits refinancing, so before you move forward, double-check that you can.
2. Your business's vital signs
The terms of your loan are issued based on your credit score, revenue, time in business, cash flow and other essentials that indicate to a lender your company's financial health. You can think of these like vital signs. Have they improved since the last time you borrowed money? If they haven't, you might want to wait until you can demonstrate financial improvement to apply for refinancing. Remember that every lender assesses your risk as a borrower. If you haven't proven to them that you're a low-risk candidate, you're less likely to find more favorable terms.
3. What you want to accomplish
What are you hoping to find when you speak to lenders? Do you want to find a loan that will lower your monthly payments? Are you hoping to extend the term of your loan; for instance, are you looking to conver a short-term loan into an SBA loan? All of these goals are different, and they will all help your business. But the best refinancing opportunity for you should align with the goals you have for your business.
4. Your loan's current terms
Do you know all of the ins and outs of your current loan? Do you know what interest rate you pay and the APR? Do you know how much you have left in both principal and interest to pay off? How is your loan structured? Does it amortize? You get the gist. You can't find the best refinancing terms to suit your business unless you understand the situation you're in now – and the one you want to get to.
5. Not every offer is worth it
Just because you get an offer to refinance your loans doesn't mean that you should take it. Refinancing is a long process, and it's worth it for the right offer. But if refinancing doesn't make a big difference for your business, like making your monthly payments more manageable, or giving you access to working capital for a longer period of time, it might not be worth the trouble. You also could be better served by waiting until your financials improve and then reopening your search for strong offers.