For small businesses, cash flow matters just as much as long-term potential. After all, it may not be possible to achieve growth without good cash flow. If you’ve already gotten a small business loan to help with cash flow, you may reach a point where you want to refinance it.
Typically, small business owners decide they want to refinance because they are able to get a lower interest rate than they could before. This means reduced monthly payments, which often improves cash flow.
No matter what the reason for refinancing your business loan, there are some things you need to pay attention to. In this article, we’ll explain the advantages and disadvantages of refinancing your business loan so that you can be ready when it comes time to consider this option.
Defining Small Business Loan Refinancing
The process of refinancing a loan involves taking the current loan balance and replacing it with a new loan. This could be due to more appealing terms or better rates. The new loan pays off the current loan and you gain the advantages of the new loan.
When you revise the terms, payment schedule, or interest rate of a previous credit agreement, it’s considered refinancing. Approval for credit over a longer term than the original loan reduces your monthly payments or may allow you to retain a comparable payment if you opt to increase the amount of the loan.
If you end up with a lower interest rate than the original loan, you’ll save money in the long run because the accrued interest won’t be as high.
Refinancing Business Loans 101
If your initial loan was at a rate of 10% over a 10 year period and the current market rates are much lower, let’s say around 7%, you may be tempted to apply for a new loan at that rate. If you can find a lender that will work with you, it’s possible to refinance your current debt with a new loan. If approved, the new loan can be used to pay off the current loan.
If you have established good credit or improved your credit since the initial loan, you may be able to qualify for a lower rate. If you have a variable rate loan with a balloon payment coming up, you may find it beneficial to refinance your loan.
Refinancing may also allow you to get a loan with fees and terms that are more favorable for your business. Refinancing your business loan can help you make less frequent payments or shorten the overall term by paying off debt quickly.
Advantages of Refinancing a Small Business Loan
There are several advantages associated with refinancing a small business loan, including:
- Reducing long-run financing costs, freeing up money for other needs
- Improving cash flow, keeping cash available for necessary expenses such as payroll, inventory, and rent
- Increasing funding amount, a positive track record/payment history may allow you to access more cash when you refinance to cover current financial needs of the business based on the terms and conditions of the loan
Disadvantages of Refinancing a Small Business Loan
However, there are also a few disadvantages associated with refinancing a small business loan that you need to be aware of:
- Could impact your credit score, not only the credit check but also increases your total debt which may not be a good thing for your business credit profile
- Penalties for prepayment, some loans tack on prepayment penalties if you pay off the loan early- you must weigh these fees against how much you’ll save to determine if it’s worth it
- Collateral requirements, if your business credit score has dropped since your initial loan, you may be required to provide collateral and you may also not qualify if your circumstances have changed
Do You Qualify?
The qualification process for refinancing a small business loan is basically the same as qualifying for a loan to begin with. These qualifications include:
- Equity: if you have not paid at least 20% of the initial loan, you may not be able to find a lender that will work with you
- Income: if your business is profitable, you’re more likely to be approved than you will if your business is not profitable
- Credit score: if your credit score has increased, your chances for approval are better than if your score has gone down or not changed at all
- Existing debt: the higher your existing debt, the lower your chances of being approved for refinancing a small business loan
- Financial history: the lender will look at your payment history, how often you borrow money, and the credit types you’ve used in the past- the more secure your financial history, the greater your chances of approval
Ready to Refinance Your Small Business Loan?
Adequate cash flow is critical for a successful small business. By refinancing a small business loan, you receive several benefits that may improve your cash flow, including lower monthly payments and reduced interest.
However, before you take the leap for refinancing a small business loan, you’ll want to speak with a financing specialist. Contact the professionals at Rustwood Capital to learn more and get help with evaluating your situation.
