Can You Refinance a Small Business Loan?

Q: How does small business loan refinancing work?

With small business refinancing you apply for a new business loan, ideally with better rates and terms, and use it to pay off your existing loan. You then only make payments on the new loan.

Q: What kinds of business loans can you refinance?

You can often refinance many different types of business loans, including term loans, equipment loans, commercial real estate loans, and business lines of credit. In some cases, you may be able to refinance SBA loans.

Q: Is refinancing right for me?

If you can qualify for a lower annual percentage rate (APR) than when you applied for your existing small business loan, you may be able to reduce your borrowing costs by refinancing. However, you’ll want to factor in any potential fees before making your decision.

Can You Refinance a Small Business Loan?; Is it possible to refinance a small business loan? Learn more about it from Lantern by SoFi.

Susan GuilloryUpdated April 28, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Just like mortgages and car loans, it’s often possible to refinance a business loan. When you refinance a business loan, you take out a new loan, ideally with better rates and terms, and use it to pay off your old one. You then only make payments on the new loan. In some cases, refinancing a business loan can lower your borrowing costs and improve your cash flow. However, it doesn’t make sense in all situations. Here’s a look at how business loan refinancing works, which loans are eligible, and when and why you might want to consider refinancing.

Can You Refinance an SBA Loan?

You can only refinance a loan backed by the U.S. Small Business Administration (SBA) with a new SBA loan in certain situations. To qualify, you generally need to have a new financing need and your current SBA lender has refused to increase or modify your loan. You may, however, be able to refinance an SBA loan with a non-SBA loan.You may also be able to refinance an existing non-SBA business loan with an SBA loan if you qualify.

How Business Loan Refinancing Works

When you refinance a business loan, you essentially apply for a new loan with the same or different lender and then use that loan to pay off your existing loan. Typically, the goal of refinancing is to replace an existing loan with one that has a lower annual percentage rate (APR), lower monthly payments, less frequent payments, and/or a longer repayment period.

When Should You Refinance?

Refinancing a small business loan might make sense for your business if you:

Can get a better annual percentage rate (APR) If interest rates have dropped or you're able to qualify for a lower rate than when you applied for your existing loan, refinancing could lower your borrowing costs.
Want to change your loan repayment term Maybe you can get a lower APR if you change your repayment period from five years to three. Or, perhaps your business has a lot of expenses right now and you’re looking to lower your payments by extending your loan’s term. (Just keep in mind that extending your loan term can end up increasing the cost of the loan.)
Want to consolidate other debts If you have several different types of small business loans with a range of APRs, you may want to roll them up into one monthly payment and interest rate.

Pros and Cons of Refinancing

Small business loan refinancing comes with both benefits and drawbacks. Here are some you may want to keep in mind.

Pros of Small Business Loan Refinancing	Cons Of Small Business Loan Refinancing
Could save you money	May have to pay fees and a prepayment penalty
Could lower payments and improve cash flow	A longer loan term can lead to higher borrowing costs
May be able to pay off loan sooner	New loan may require collateral
May be able to get a larger loan	Refinance may temporarily have a negative impact on credit

Pros

One of the biggest benefits of small business loan refinance is that you could potentially save money. Why pay more than you need to in interest? The money you save can go back into building your business. Also, if the new lender approves you for a larger loan amount, you could use the capital to help grow your business and possibly avoid having to take out a second loan down the line.If, on the other hand, you refinance with a loan that has a shorter term, you’ll be able to pay off your debt faster.

Cons

Some lenders may charge a prepayment penalty fee if you pay off the original loan early. In addition, the new loan may come with fees. You’ll have to do the math to see if these fees are still less than what you’ll save in interest.While refinancing for a longer loan term can lower your monthly payments and increase cash flow, keep in mind that it can also mean paying more interest over the life of the loan. Also, keep in mind that even if your first lender didn’t require collateral, the new lender might require you to pledge an asset to secure the loan. While collateral can help reduce your APR, you could lose the asset if you run into difficulty repaying the loan.And, just as applying for any loan, refinancing a business loan can also have a temporary negative impact on your credit, since the new lender will need to make a hard credit pull before approving you for a loan.

What Types of Business Loans You Can Refinance?

Here’s a look at the different kinds of small business loans you may be able to refinance.

Commercial Auto Loan

If you use cars, trucks, or vans in your business, you may have at least one auto loan. If you’re paying a high APR for that loan, you may want to explore auto loan refinancing. This may also be appealing if you have multiple car loans and would like to combine them.

Short-Term Loan

Short-term business loans can be useful for temporary gaps in cash flow and emergency expenses, and are available for businesses with every type of credit. If you borrowed money when your business had limited or poor credit, you may be paying a lot in interest. If your qualifications as a borrower have improved since then, you might be able to refinance at a lower rate.

Equipment Loan

If your business uses heavy machinery or other equipment and you took out a loan to pay for that equipment, you may have built equity that you can use to refinance the equipment loan.

Commercial Real Estate Loan

The same goes for business real estate loans. If you’ve built equity through your property, you may be able to leverage it with a small business loan refinance.

How to Qualify for Refinancing

When you apply for a business loan refinancing, lenders will often look at your personal and business credit scores, time in business, annual revenue, debt-to-income (DTI) ratio, and financial statements, and cash flow. They may also consider your available collateral.If your credit score or annual revenue has improved since you got your existing loan, it can be a good idea to point this out when you apply for refinancing. You may also want to highlight the fact that your time in business is longer than when you first applied for your loan, especially if you applied for your original loan when your business was just starting out.

How to Refinance a Small Business Loan

Refinancing a small business loan will likely be similar to the application process you went through for the original loan. Here’s a look at the steps involved.

Figure out how much money you’re looking to borrow. You’ll want to first determine how much you owe on your existing loan(s) and whether you want any additional capital added to that number.
Look at your credit scores. This can help you determine what kind of rates you may be able to qualify for.
Shop around. It can pay to shop around and compare different lenders, looking at APRs (this includes both the interest rate and fees), available loan amounts, repayment terms, and collateral/personal guarantee requirements.
Gather your documents. When you apply to refinance your business loan, the lender will review certain documents to determine whether you qualify. These may include: personal and business tax returns, bank statements, financial statements, incorporation documents, and your business plan.

Once you’re approved for your refinancing loan, you can use the proceeds of the loan to pay off your original business loan(s).

The Takeaway

A small business loan refinance could help you save money that you can put back into your business. However, it’s important that you carefully consider the reasons why you want to refinance to make sure that it makes sense for your situation. If you’re interested in exploring your business loan refinancing options, Lantern by SoFi can help. With our online debt financing marketplace, you can search for small business loan options without scouring the web and checking multiple sites. With one short application, you’ll be matched with a loan offer that meets your company’s needs and qualifications.Let Lantern help you find the right financing solution for your small business.

Frequently Asked Questions

How does small business loan refinancing work?

What kinds of business loans can you refinance?

Is refinancing right for me?

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About the Author

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.

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