Whether you’ve recently started your own business or you’ve been an entrepreneur for decades, cash flow isn’t always constant. When you need to meet payroll obligations or invest in new equipment, a business loan may be a great option.
Business loans are valuable tools for scaling your company. However, once you’ve taken out a loan, it’s a good idea to monitor market conditions. Doing so allows you to find opportunities for better payment terms, interest rates, and more. While refinancing your business loan may typically be time-consuming, the fact remains that it’s a valuable tool. Here’s some information you should consider:
Loan consolidation vs. loan refinancing
While many people use the terms interchangeably, loan consolidation and loan refinancing are very different concepts. Understanding those differences helps you choose the right option for your business, based on your current financial status, goals, and strategy.
Loan consolidation focuses on simplification. It combines several existing loans into a single payment, making cash flow easier to manage and reducing administrative complexity. While consolidation can improve organization and predictability, it does not automatically lower interest costs or improve loan terms unless those changes are specifically built into the new structure.
On the other hand, refinancing combines one or more existing loans into a new loan, which typically improves the economics of your debt. Business owners typically rely on refinancing to take advantage of lower interest rates, more flexible repayment terms, and structures that better align with their company’s needs.
The benefits of refinancing business debt
No matter which strategy you might use, if the new loan helps you better manage cash flow and decreases the amount of interest you pay each month, it’s likely a good business decision.
While getting a new loan takes some time and requires you to fill out paperwork, there are plenty of potential benefits, including:
- Shorter repayment terms
- Lower interest rates
- Stabilized cash flow
- Quicker debt repayment
- Increased available cash in your business
How business loan refinancing works
Refinancing business debt involves replacing an existing loan with a new one that has more favorable terms. This allows you to save money over the life of the loan. By using the money from a new loan to repay your old loan (or loans), you may be able to focus on repaying a single lender with friendlier terms. Options include SBA loans, bank term loans, and more.
7 steps you may take to improve your business finances
Before you jump into a new loan, consider these seven steps. Answering a few questions and looking at your cash flow and debt obligations can help guide you as you search for the right loan to support your business.
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Determine whether you're in a position to refinance
The first step in refinancing is evaluating your existing debt to see whether a new loan would actually improve your financial position. Some factors to consider when deciding whether to refinance include:
- Current debt total
- Monthly loan payments
- Each loan’s interest rate
- Months remaining on the life of each loan
- Payment frequency
- Early repayment penalties
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Determine the refinancing goal
Once you have a clear picture of your current finances, it’s time to decide why you want to refinance. Start by evaluating the benefits and comparing them to your business goals. Before you start the process, rank your goals in order of importance and how realistic they are.
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Put together a list of existing debts
Most business owners choose to refinance their high-interest debts with daily or weekly repayment schedules. These can include merchant cash advances, short-term loans, and business credit cards. Make a list of all of your existing debts.
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Review the financial details
Look at all of the details of different refinancing options, including interest rate, closing costs, loan terms, repayment schedules, and more. The goal of any loan refinancing is to bring down the overall cost of the loan, so you need to understand how each of your options works.
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Consider lender options and pick the right one
You may find yourself overwhelmed by the number of lenders that you can choose from. Fortunately, you may easily vet your options online. When researching your options, consider the following:
- Check rates, fees, and prepayment penalties on the lender’s website
- Read customer reviews on Google® Reviews, Trustpilot®, BBB®, and Consumer Affairs(®)
- Confirm whether personalized customer support is available by phone or online chat
- Ask about application timelines and speed to funding
Even if you need funds quickly, remember that faster isn’t always better. Choosing a lender based solely on speed often results in higher interest rates, less favorable repayment terms, and other problems. Look for a lender with a quality reputation who can get you your funds quickly, but not at the expense of your financial future.
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Use an SBA loan as part of refinancing
SBA loans, which are partially backed by the Small Business Administration, offer low rates, 10-year terms, and manageable monthly payments that won’t put a strain on your cash flow. They’re diverse options, which can be used for refinancing, working capital, equipment purchases, inventory, marketing, hiring, and more. They provide several benefits, including:
- Helps build business credit
- No prepayment penalty
- Long terms mean very low monthly payments
- Available nationwide
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Apply to lenders
Once you’ve decided that refinancing is the right choice for you and have selected a lender, it’s time to submit your application. Before you start filling out forms, make sure that you meet eligibility requirements.
Typical eligibility requirements for a $30,000 to $350,000 SBA 7(a) working capital or debt refinance loan from SmartBiz Bank® include:
- At least 2 years in business
- Personal credit score of 650+
- U.S.-based business owned by a U.S. citizen or lawful permanent resident who is at least 21 years old
- No outstanding tax liens
- No bankruptcies or foreclosures in the past 3 years
- No recent charge-offs or settlements
- Current on government-backed loans
Required documents include:
- Last 2 years of business financials
- P&L statements for the last two years and YTD (past two years and YTD)
- 1-3 years of projected financials
- Ownership information
- Business licenses and leases
- Loan application history
- Last 2 years of business tax returns
- Last 2 years of personal tax returns
Final thoughts
The small business finance landscape can be intimidating, especially early on when financing options are limited and expensive. As your business matures and your credit improves, more affordable refinancing opportunities may become available.
By following the steps above, you may be better equipped to identify and secure the refinancing option that best fits your business goals.
FAQs
What are the benefits of refinancing business debt?
Refinancing business debt offers a variety of benefits, including lower interest rates, more favorable payment terms, and increased cash flow within your business.
How does business loan refinancing differ from loan consolidation?
Loan refinancing provides lower monthly payments, while loan consolidation focuses on turning multiple monthly payments into a single payment.
Can SBA loans be used to refinance existing debt?
Yes, you can use an SBA loan to refinance existing debt. As long as you meet the requirements, you can generally access loans between $30,000 and $350,000 for loan refinancing.
When is the best time to refinance a business loan?
The right time to refinance your business loan will depend on your financial position and market conditions. However, many businesses consider refinancing under the following circumstances: cash flow is tight, interest rates have dropped, business revenue has increased, or your business has accrued several loans that could be consolidated.
