Did you take out a business loan while starting your business? You might’ve noticed how limited options you had back then compared to now. And, with the turmoil of economic changes, it’s no surprise if you want to save money and improve the cash flow in your business. So, refinancing your business loan for a better deal might be the one for your business in 2023.
This blog will guide you on refinancing your business loan and provide greater insight into some business loans you should apply for.
Why Consider Refinancing Business Loans?
Refinancing means taking out a new loan and repaying an existing business loan. The main reason for considering refinancing a business loan is to save money on your interest payments.
Per se, you are a business owner. Let’s also say that you took out a loan and purchased equipment. During the initial years, the loan comes at a high-interest rate, and monthly payments are higher. This situation happens due to the less credit score. But as you grow your business and have more financial credibility, refinancing provides more flexibility. This flexibility spreads on interest rates and monthly payments.
Is refinancing right for your business?
Even though refinancing provides many benefits concerning interest payments, is it right for your business?
Let’s assess multiple scenarios where refinancing a business loan makes sense:
Scenario 1: If the interest rate has lowered since you took out the business loan. Refinancing can decrease monthly payments.
Scenario 2: Refinancing may be a good choice if the repayment term extends beyond the refinancing period. It will streamline your business cash flow.
Scenario 3: Suppose you have taken multiple loans for your business with different interest rates. It is also possible to simplify monthly payments by taking out one loan with a collectively lower interest rate.
Let’s assess multiple scenarios where refinancing a business loan doesn’t make sense:
Scenario 1: If you have to pay prepayment penalties for refinancing since your original loan term has not ended.
Scenario 2: If closing costs are too high. Here, the closing costs include appraisal, title, and application fees.
Scenario 3: If you have a lower credit score. There’s a high chance of not qualifying for a refinancing business loan in this case.
Steps to Refinance Your Business Loan in 2023
Follow these simple 6 steps to refinance your business loan:
Step 1: Figure out your refinancing goal
Before figuring out new loan options, it is best to research what your business wants to achieve from refinancing.
What are your refinancing goals:
- Do you want to lower your monthly payments?
- Do you want the payments to occur less frequently?
- Do you want to decrease your debt cost?
With a clear idea of the refinancing goal, you’ll get an idea of what your business demands and what scale of business loans in Cincinnati and terms suit you.
Step 2: Figure out how much you owe
Paying the existing debt before refinancing your new business loan is a must.
- How many outstanding loans do you own?
- How many payments have you made or yet to make?
- When is your final loan payment?
- What is your current interest rate; is it fixed or variable?
These financial details will help you look for new options to determine whether refinancing makes sense for your business.
Step 3: Assess your eligibility for refinancing
To qualify for any business loan, you need to become eligible for it.
Check your eligibility criteria by figuring out these questions:
- What is your credit score (business & personal)?
- How long have you been in the business?
- How much revenue and profit do you generate annually?
- What is your DTI & DSCR ratio? (DTI-Debt-to-Income; DSCR-Debt-service coverage ratio)
It is crucial to know these details before applying for new business loan applications. If you’re not eligible for any of these criteria, then there’s a 99% chance that you might get rejected.
Step 4: Gather the correct paperwork
While refinancing your small business loan, lenders often ask for documents to assess your repayment credibility.
Some of the main documents are:
- Bank Statements: Balance Sheet, Income Statement, Tax Statement
- Business License
- Business Plan & Insurance
- Accounts Payable
Step 5: Compare the lenders
Comparing the lenders, their reputation, loan terms, fees, interest rates, and repayment terms are always while refinancing your business loan. Additionally, try looking for lenders who will let you apply for prequalification so that you can go for a soft credit check. This qualification doesn’t impact your credit score but gives you an idea of what you can qualify for.
Step 6: Application submission
Once you’ve checked all the steps, submit your application and documents to the lender. Note that you might get an immediate response from your lender if you qualify for the refinancing. And some lenders also take a couple of days to months; this is especially true if you’re applying for government loan programs like SBA loans.
Types of Business Loans You Can Apply For Refinance
Here is the brief on some of the business loans that you can easily apply for refinancing:
1. Business Line of Credit
It is a great option for refinancing a business loan. You can use a pre-approved credit limit for your business expenses. The good part is you only have to pay interest on what you borrow, not the entire credit limit.
2. Equipment Financing/Loans
Equipment financing loans are a loan to purchase or lease equipment in your business. With this loan, you can easily buy equipment on collateral.
3. Business Credit Cards
Business credit cards have the most benefits, like points of rewards and cashback on business purchases. These cards help carry out everyday business transactions and build credit scores.
4. Working Capital Business Loans
This loan is best if your business seeks funds to cover working capital (day-to-day expenses). It is quick and has a shorter repayment period. Your business can easily use it to pay rent, payroll, and various operational costs.
Refinancing a new business loan has terms that suit your business better, such as:
- Decreased interest rates
- Increased repayment period
- Decreased monthly payments
So, refinancing your business with a new loan does help in optimizing your cash flow. However, it is best to determine the correct loan, terms, and conditions and gather the paperwork to secure it.
Hence, take the time to explore the options; you can easily do it with the right support and guidance!