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Refinancing a Small Business Loan: Complete Guide

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Updated December 2, 2020
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Refinancing a Small Business Loan: Complete Guide
As the COVID-19 pandemic continues, many businesses are seeking help to stay open. If you are a small business owner in need of support, there is help available. Learn more about the CARES Act enacted by Congress in 2020, which provides supportive measures to help small business owners like you successfully navigate these challenging times.After paying business loans for a period of time, you may find that there are options for reducing your debt even further. This is where refinancing a business loan comes in.When a business owner refinances a business loan, they often do so to secure a better interest rate and business loan terms that better align with their financial goals. Ultimately, refinancing business debt can help free up cash flow (or save you in interest over the long-term), giving your business more room to breathe and grow, one way or another. But do the benefits of refinancing a business loan outweigh potential costs of the refinance itself? And what does a refinance entail? Before you decide on a business loan refinance, read this guide to learn about:
  • What refinancing a business loan means
  • The pros and cons of refinancing a business loan
  • Loan options for refinancing 
  • Steps to apply for business loan refinancing

Business Debt Refinancing vs. Debt Consolidation

It’s not uncommon for people to use these terms interchangeably, but there is a difference between refinancing and simply consolidating your debt.Debt consolidation is the process of combining multiple loans into one, ideally more manageable loan that often has a lower interest payment, thus saving you money over the life of the loan.Business debt refinancing is the process of taking out an entire new loan to pay off one original loan, hopefully at a lower interest rate than the original loan or with a different term (longer or shorter), thus saving money on a monthly basis or over the life of the loan. 

When Is a Good Time to Refinance a Business Loan?

There are a number of factors that likely contribute to your choice to refinance, but here are a few to consider:
  • You improved your credit score
  • Your business had an increase in revenue
  • You have significant business history
  • You want to pay off an expensive short-term business loan
  • Refinancing a business loan could save you money
Generally speaking, if your qualifications have improved, you may be eligible for more affordable financing, in which case refinancing your business loan(s) could be a good option.

What Is Business Loan Refinancing?

Business loan refinancing allows the business owner to potentially reduce the overall cost of their debt by paying off an existing loan with a new loan. The goal is to secure a new loan with more favorable rates or terms than the original loan. In essence, you’re getting a new business loan to replace the original one—so the debt doesn’t disappear, but is hopefully less costly to the borrower. With a business loan refinance, and depending on your personal and/or business financial picture, you may be able to:
  • Secure a better interest rate/APR 
  • Improve loan terms (for example, to  have less frequent payments)
    • Refinanced business loan terms can vary depending on the original purpose of the loan. For example, refinancing equipment loans may result in a shorter term if the equipment’s “lifespan” has shortened from years of use. 
  • Lower monthly payments by extending your loan term
You can refinance business loans through different types of lenders like banks, credit unions, and alternative online lenders.

Pros and Cons of Refinancing a Business Loan

As with any type of small business loan, there are pros and cons to consider ensuring that you’re making a good choice for your business. The following are some pros and cons of refinancing a business loan.Pros
  • Lower monthly payments
  • Better monthly cash flow due to lower payments
  • Can help prepare for growth–with more debt paid off, you can put attention on expanding your business rather than just trying to break even
  • Shortened loan terms can help pay off debt more quickly
Cons
  • A hard credit pull (required as part of the application process) can impact credit score for the short-term, which may not be favorable if you already have a lower credit score
  • Potential prepayment penalties when paying off the original loan. Check with your lender to see if there are penalties before refinancing a business loan
  • May need collateral to secure the business loan refinance. You can use personal or business assets, but must consider whether you’re willing to lose those assets in the event that you default on the loan
  • Longer loan terms can mean more interest paid over the life of the loan

Business Loan Refinancing Options

When you’re ready to refinance a business loan, there are a few lender options to consider. The following sections will detail what to expect from each. 

Bank Loans

While banks may offer business loan financing, they typically have more stringent qualifications, making it more difficult to obtain refinancing for some borrowers. Here are a few facts about bank loans:
  • May offer lower interest rates
  • May offer higher loan/refinancing amounts
  • May offer better long-term loan solutions than alternatives lenders
  • Good for borrowers with strong credit rating/history
  • Processing may take longer than other types of business loans

Alternative Lenders

Alternative lenders are non-bank entities that offer small business loans to borrowers, including those who may not qualify for loans at a traditional banking institution. This can include online lenders that offer various loan products to serve small business owners or individuals. Alternative lenders:
  • May offer faster approval and financing
  • Typically have fewer or lower qualification requirements
  • May have higher interest rates depending on creditworthiness
  • May be a good option for borrowers who don’t qualify for bank or SBA loans
  • May offer unsecured business loans, which don’t require collateral

SBA Loans

SBA loans are those guaranteed by the U.S. Small Business Administration and offered by approved lenders. The guarantee offered by the SBA gives lenders the ability to lend to riskier borrowers. The SBA does offer business debt refinancing, but it comes with the following conditions:
  • Purpose of the original loan would have been SBA-eligible
  • The business loan needs to offer the borrower a “substantial benefit” with the payment amount coming out to at least 10% less than the borrower’s current loan.
  • Borrower needs to provide written justification explaining why the current loan isn’t on “reasonable terms”
  • Borrowers can refinance debt from the same financial institution but have to document a 36-month payment history without unjustified past dues
  • Generally, borrowers cannot refinance an SBA loan with another SBA loan, but may be considered under certain circumstances
SBA loans are known for offering some of the lowest interest rates, but qualifying for a loan can be difficult without meeting substantial eligibility requirements. 

Steps for Refinancing Business Loans

To properly prepare for refinancing a small business loan, follow these steps:

1. Set your refinancing goal

Why do you want to refinance? That’s the first question to ask before taking the next few steps. Refinancing a business loan may have many benefits, but make sure your goals align with those benefits. Consider these common reasons for refinancing:
  • Do you want lower monthly payments?
  • Do you want a shorter loan term?
  • Do you want to consolidate debts?
Additionally, think about your long-term business financial goals and how a refinance could affect those goals positively or negatively. 

2. Calculate how much you owe

This calculation includes the current loan balance and interest rate to determine how much you need to borrow to cover what you owe. If you have other loans you want to refinance, make a list of each debt and include the following information:
  • Current loan balance
  • How much time is left in loan term
  • Payment schedule
  • Payment amount
  • Current interest rate 
Additionally, calculate prepayment penalties if your current lender has them and what they may cost if you refinance. 

3. Examine your business financials and gather documents

When refinancing a business loan, you’ll need to take time to look at your business financials to help you determine what you may qualify for, how much to borrow, and what you can afford. Gather numbers such as:
  • Annual revenue
  • Personal and business credit scores
  • Profit and loss statements
  • Bank statements
  • Tax returns
As you review your financials, it’s a great time to organize important documents that lenders may want to see when you apply, including those noted above. 

4. Compare lenders

When you’re refinancing a business loan, you may have the option to apply for a refinance loan from your current lender or from a new lender. This new lender could be a traditional bank or an alternative lender, but you’ll want to carefully consider the pros and cons of different lenders and their eligibility requirements to make sure you are able to qualify for the business refinance loans they offer. Make sure to compare lenders’:
  • Loan terms
  • Interest rates
  • Additional fees (origination, pre-payment penalty, etc.)
  • Types of loans they refinance and how they may affect your loan 
  • Collateral requirements
  • Loan amounts
Additionally, consider differences between banks, SBA loans, and online loans from alternative lenders. You may find it easier to get a loan online, but they may not offer rates that align with your goals. Conversely, you may qualify for a bank loan, but they may take longer to process your application and loan. 

5. Determine what you qualify for

Once you’ve set your goals and done research on your business financials and lender options, use that information to see which loan programs you’re most likely to qualify for. When you apply for a loan, the lender will conduct a hard credit pull, so you want to make sure you’re confident about your eligibility to avoid multiple applications. 

6. Apply for business loan refinance

After you’ve chosen the loan you qualify for, you can begin applying. If applying at a brick-and-mortar location, be sure to bring your documents to streamline the process. 

See How Lantern by SoFi Can Help Refinance a Business Loan

Even with all this great information, understanding how to refinance a business loan can be overwhelming. The process of choosing a loan should be straightforward so that you can make the right choice for your business in a timely manner. And that’s exactly what you get with Lantern. You get access to a network of reputable lenders and information to help you make an informed decision based on your qualifications, business needs, and goals. Whether you’re looking to refinance a commercial loan or find a startup loan for your small business, Lantern can help light the way.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.SOLC20082

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Lantern

Lantern

Lantern is a product comparison site that makes it easy for individuals to shop for products and compare offers with top lenders. Lantern is owned and operated by SoFi Lending Corp., the digital personal finance company that has helped over one million people get their money right.
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