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Small Business Loan Refinancing

Almost all business owners take out loans at some point in their company’s operation. Some businesses may also take out multiple loans and want to consolidate those debts. That’s where refinancing comes in. Refinancing can help owners reduce the number of weekly or monthly payments that they have to make, and also help them secure a lower rate on the overall amount of their debts.

What Goes Into Refinancing A Small Business Loan?

Before refinancing your small business loans, you should estimate the total refinancing amount that you need. To do this, add the current balance owed to the additional capital and origination fees of your current loans. Once you have this number, you can start evaluating which lenders you want to borrow from in order to refinance the loans. Once you’ve been approved and agree to an offer, you can use the funds to pay the already-existing debt that you have, in full. Some lenders may also offer the option to pay your creditors directly.

Why Should You Refinance A Small Business Loan?

Refinancing a small business loan can help business owners reduce both the number of their loan payments and the amounts. If you have multiple loans with high interest rates, finding a single, larger loan with a lower rate could help to ease your debt burden.

When To Consider Refinancing

Refinancing can help business owners get out of a cycle of debt if they’re having trouble with already-existing loan repayments. Borrowers can use refinancing to get lower rates and reduce both the number and the amount of payments on their debts.

Required Documentation for Business Loan Refinancing

Before applying for business loan refinancing, you should have a few documents ready to submit:

  • Two years of personal tax returns
  • Two years of business tax returns
  • Past two years of P&L statements
  • Past two years of business financials
  • Ownership information
  • Owners’ resumes
  • Business licenses
  • Business history and overview
  • Business leases
  • Loan application history

How To Refinance A Small Business Loan

Penalties

Before refinancing your small business loan, make sure you consider all of the potential fees and penalties that might come with your next loan. Even if a loan has a low interest rate, it doesn’t mean that it won’t come with fees such as a steep origination fee, payment fees, prepayment penalties and closing costs.

Don’t Overborrow

Although a large amount of cash might sound appealing, remember that you’ll have to pay off the entire amount that you borrow, along with interest and fees. When refinancing your small business loan, it’s best to only borrow the amount that you need.

Avoid MCAs

A merchant cash advance might seem like a good idea if you fall short of qualifying for traditional or online loans. MCAs provide fast cash and access to large amounts of money. However, they are considered to be the “payday loans” of the business lending industry due to their exorbitant interest rates and lack of federal regulation.

Consider SBA Loans

If you have great credit and have been in business for more than two years, you could eligible for a Small Business Administration (SBA) loan. SBA loans come with some of the lowest interest rates and most flexible repayment terms in the industry.

Take Inventory of Finances & Debts

Before applying to refinance your debt, make sure you understand exactly how much debt you have in total. Also consider how much you can afford to repay at any given time. Remember that refinancing your debt is only helpful if you can afford the repayments on the loan that you’re using to refinance.

Consider Capital Needs

Make sure you understand your capital needs, or how much money you require to be accessible to you on a daily basis, before refinancing.

What Is Needed Before Refinancing A Small Business Loan?

Profit/Loss Statements: Your profit and loss, or P&L statements give your net operating income, or your operating expenses subtracted from your gross revenue. This number should come out positive after refinancing.

Balance Sheets: Your balance sheet gives your quick ratio and working capital ratio, which borrowers look at when evaluating your application. These numbers are used to determine your financial health, as well as give you an idea of the collateral that you can use for a loan.

Invoices: Your invoices list all of the payments that are owed to you by customers.

Bank Statements: Your bank statements will give lenders an idea of how much money you have in the bank, your financial history and your average expenditures.

Credit Scores: A personal credit score above 640 is the most ideal score to have when applying for a small business loan. Your score is also one of the most heavily-weighed aspects of your application.

Tax Returns / Tax Info: Lenders may ask for multiple years of tax returns, so make sure you have at least the last two years of your returns ready to submit with your application.

The Best Options For Small Business Loan Refinancing

SmartBiz

Pros:

  • Low maximum APR of 11.04%
  • Faster to fund than standard SBA loans
  • Long repayment terms of up to 10 years
  • Easier application process than for traditional SBA loans

Cons:

  • Difficult to qualify for
  • Takes several weeks to fund
  • More complex application process than other online lenders
  • Higher fees than traditional online lenders

» MORE: SmartBiz Loan Review

LoanBuilder

Pros:

  • No-commitment loan cost estimate
  • Low maximum APR of 19.4%
  • No origination fee
  • No closing costs
  • Access to up to $500,000

Cons:

  • $20 returned payment fee
  • Short repayment terms between 13 and 52
  • Weekly repayments
  • UCC-1 filing required

OnDeck

Pros:

  • Low minimum credit score of 500 for term loans and 600 for lines of credit
  • Funding within as little as 24 hours
  • Access to amounts of up to $500,000
  • Short, online application

 Cons:

  • Potential for high interest rates, with APRs as high as 99% for term loans and 63% for lines of credit
  • Daily or weekly repayments
  • Short repayment terms between 3 and 36 months

» MORE: OnDeck business loan review

Conclusion

Refinancing your debts can help you consolidate multiple payments into one while reducing the overall cost of those loans. Before refinancing, however, you should make sure to calculate exactly how much you need. SBA loans can be the best option for low-cost loan consolidation. However, if you don’t meet the SBA requirements, you can still find a low-cost loan online or through a traditional bank. Before agreeing to any loan offer, make sure you have compared multiple lenders and thoroughly understand all of the potential fees and penalties that come with a product. Refinancing should reduce your overall cost, not increase it.

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