A majority of small businesses rely on loans to operate. An individual or a group of entrepreneurs will rarely have enough capital themselves to start up a company. When you apply for the first loan for your business, lenders will be skeptical of your plan. They will focus more heavily on your financial situation to determine the terms at which they will be willing to lend to you. More often than not, this can result in you entering into a loan agreement with a higher interest rate or with other terms that are not exactly what you were hoping for.
Why You Should Refinance Your Business Loan?
The excellent news is that you won’t be stuck with this loan for life. There is a process called refinancing, which could be hugely advantageous for you and your business. In this piece, we’ll delve into whether or not refinancing your business loan could be useful for you and your business. We’ll also go through the steps that ensure your business refinancing will be successful.
The first question then is, why should you refinance your business loan?
There are several potential benefits of taking this step. The first and probably most important benefit to you is that you’ll be able to get a lower interest rate on your loan. Each time you make your monthly repayment, a portion of that is reducing the loan principal, and another part is paying interest to your lender. The higher the rate, the more money you’re putting in the lender’s pockets rather than reducing your liability. Consequently, lowering the APR should always be a goal.
Another loan term you may be able to change to suit your needs better is the term of the loan. The length of the loan is the loan term. If you can extend it, then you will lower those monthly repayments which are hurting the bottom line of your business.
In addition to these two reasons for refinancing, there is also the possibility that you could consolidate multiple sources of debt into one liability. As your business grows, it is not uncommon that you will have had to borrow money from several different lenders as different cash flow requirements arose. Sometimes this can make the accounting and payments more complicated than they need to be. Consequently, refinancing to consolidate these into one loan can be a considerable help administratively.
So, as we’ve identified, there are quite a few potential benefits to business loan refinancing.
When to Refinance Your Business Loan
The next logical question then is when you should do it?
The answer to ‘when’ is directly linked to the benefits listed above. You should only refinance when something has changed significantly with your financial situation, with your business, or in the macroeconomy that would mean that you would get a better rate or term on your loan.
What do these significant changes look like in practice?
Well, since a small business loan is often predicated on your finances to some degree, if your credit score is better than when you applied for the original loan, then this could help significantly. Another example will be if your business has now proven itself to be successful and financially sound in the year since you first applied. Lenders will look very kindly on a company that has financial statements that show profits and a strong balance sheet.
Finally, if market interest rates have come down significantly since your current business loan was issued, then there are probably many lenders who would be willing to refinance at a lower price.
After reading all this, if you understand the benefits and think it’s a good time for your business to refinance its debt, then here are some steps to successfully doing so.
How to Refinance Your Business Debt
First, you need to prepare for the refinancing. Preparation involves taking a good look at your business’ financial statements, as well as your finances. It also means having a clear goal in terms of what you’re trying to accomplish with refinancing.
Explore your refinancing options
The second step is to explore your refinancing options. There are so many different lenders out there and getting to the essential details of what all of them can be challenging. We cannot stress enough though that investing some time and effort at this stage of the process will be so beneficial eventually.
Apply for the loans
Once you have found some good option that you think look good on paper, it is time to apply for loans from these lenders. It is essential to apply to more than one company because there is always the chance that your favorite lender might reject your application or offer worse terms than you were expecting. Hopefully, you will receive many loan offers and will have your pick of some great options that will help your business massively going forward!
Read the Fine Print
As always, there are some cautionary notes you should bear in mind before engaging in this process. Sometimes, the cost of refinancing can be higher than the benefits. Refinancing can be time-consuming, so there is the nonfinancial cost of the time that you spend going through the motions.
There can also be a financial penalty involved with canceling your existing loan early. Not all loans have a prepayment fine, but it’s vitally important to check if yours does before you refinance. So, if you receive only a slightly better interest rate on your loan, for example, make sure you ask yourself if it is worth going through the whole refinancing to save a few dollars each month.