Determine why you need to Refinance a Busines Loan
Updated: Feb 12
Enough is enough! Tired of paying multiple lenders different payment amounts at different times with different interest rates? Refinancing business loans is one of the best ways to get a better handle on your existing debt. Not familiar with how refinancing a business loan actually works? You’ve come to the right place! Learn all about refinancing business loans below. How does business loan refinancing work? The process of refinancing business loans is not as complicated as you may have previously thought. In fact, refinancing a business loan can be accomplished in 9 simple steps. The basic process goes like this: determine if you need to refinance, look over your business’s finances, check out your options, pick the right one for your business, and put the funds to use! Generally speaking, lenders won’t impose restrictions on the specific types of loans that they’ll be willing to help you refinance. The factor they’ll be more concerned about when reviewing your application for refinancing a business loan is whether you have too many existing loans. Having a large number of outstanding loan balances will signify to the lender that you may not be the most reliable borrower since your finances have become so tied up in paying off debt in so many places. Below, we provide you with the full rundown of how refinancing a business loan is done in more detail.
Step-by-step guide to refinancing a business loan: 1. Determine why you need to refinance
Are you considering refinancing a business loan for a specific reason, or just because you can? We certainly hope it’s for a specific reason. Having a clear idea of what you aim to accomplish is essential when refinancing business loans. Otherwise, you could actually end up paying more rather than less. Will refinancing a business loan give you smaller payments? A lower interest rate? A longer repayment term? Will you face fees when applying for the new loan, or when paying off current loans in advance? It’s important to take all of those factors into account before refinancing a business loan. 2. List your business debts
The first real step in refinancing business loans is to compile an accurate list of what your business currently owes. Having a complete picture of all of your business’s liabilities will help in determining whether refinancing a business loan is the right option for you, and how much you’ll want to apply for. When considering existing loans specifically, you should list:
Early repayment fee(s)
Remaining length(s) of loan term(s)
Scheduled payment amount(s)/frequency
Being accurate on this step is key to making the choice of whether or not refinancing business loans is the right way to go for your business. 3. Evaluate your business’s financial health
Aside from listing your existing business debts, it’s crucial to also have a clear understanding of your business’s overall financial standing. Gathering information about your business’s revenue will not only help you to choose the right option for refinancing a business loan but will also get you prepared with the necessary documents when you do apply. Keep the following documents on hand so you’ll be ready to apply for refinancing a business loan:
Company Bank statements (Previous 12 months)
Month to date transactions
Business Tax Clearance Certificate
Profit and loss statement
4. Select the right lender and loan type
It used to be the case that shopping and comparing business loan options would mean going through lenders one-by-one until you found the one you liked. But with so many lenders out there, and so many different types of business loans. Now your business can find the optimal loan and lender by using LoanGuru's online business lending marketplace. No more wasting time, no more stressing about getting stuck with the wrong funding solution.
After you’ve chosen which lender and loan type you’ll apply for, you’ll have to collect a number of required documents. This is when all of that paperwork you gathered when assessing your business’s financial health will come in handy. 5. Get approved
Oftentimes, a lender may require additional information after you’ve applied. Before they provide you with funding for refinancing business loans, lenders will want to evaluate the level of risk they’ll be taking on. Having more information will help them do that. 6. Use the funds
You decided that refinancing business loans is the right way to go. You gathered the necessary documents, chose the lender and loan, applied, and got approved. Now it’s time to put the funding to work by paying off your existing loans. Once you’ve done that, you’ll then need to get started with paying back this new loan.
Reasons to refinance a business loan There are a variety of reasons why refinancing business loans could be the right decision for your business. Here are a small handful of reasons why you should consider refinancing a business loan. 1. Overall cost and terms of a new business loan will save you money
Refinancing a business loan is a particularly good idea when the new loan would wind up saving you a significant amount of money. What’s a ‘significant’ amount of money? First off, consider the fees you may face for paying your existing loans off early, and fees included in applying for and obtaining the new loan. Then, see if the potential savings outweigh the costs associated with getting the new loan. 2. Your business’s financial standing has improved
If your business’s financial health has improved since you initially took on the debt, then it could be an ideal time for you to consider refinancing a business loan. A lot can happen in a relatively short time – just think about how your business looked a year ago. Having spent more time in business, your revenue may have increased. As your business grows stronger, lenders will naturally take on less risk in providing you with a loan and will be more likely to provide you with better rates, terms, and so on. Having the ability to even consider refinancing business loans is one of the great perks that come as a result of improving your business’s financial profile.
3. You have multiple sources of debt
One of the top reasons for refinancing a business loan is if you have several types of debt piled up. With different interest rates, payment amounts, payment schedules, and so on – it’s clear that dealing with multiple sources of debt can become a headache. Refinancing business loans and other debts (also known as debt consolidation) can save you a significant amount of time and energy, which may make it worthwhile even if you’re not saving money. When is refinancing a business loan a bad idea?
Deciding whether or not refinancing business loans is your best option will take careful thought. Consider the following reasons why you may want to avoid refinancing a business loan. 1. It won’t save you money
Much of the time, the main purpose of refinancing a business loan is ultimately to save money. If you run the calculations and see that refinancing a business loan will actually increase the cost of your debt, then perhaps it’s not your best route of action. Then again, there’s a value that comes in forms other than money – like time. So, if you’re intent on cutting down the amount of time you spend on making multiple payments every month, then refinancing business loans may be worth it even if you’re not saving money. 2. Your business credit score is weak
Looking for better rates, payment amounts, and payment schedules by refinancing a business loan? Then you’ll usually need a strong credit score (both personal and business credit). 3. You have just one major source of debt
The time, money, and energy you’ll spend on getting the necessary documents together, applying for the new loan, paying any fees, etc. may not be worth it if you only have one major source of debt. This is another situation where you’ll need to use your best judgment, but the point is if you have the ability to pay off your existing debt without refinancing a business loan, it may be the better way to go. Generally speaking, refinancing business loans has clearer benefits for small businesses that have multiple sources of debt that have begun piling up. Is your business eligible for refinancing? As with any type of business funding solution, the criteria you’ll need to meet to get approved for refinancing a business loan will differ from one lender to the next. That said, there are some general qualifications that you can safely assume you’ll need to meet (and documents you’ll need to have on hand) to be eligible for business loans, including:
Business operating time of at least 1 year
Healthy credit score/history
Business bank statements for the past 6 months
Business Tax Clearance Certificate
Last Two Sets of Filed Financial Statements with the Companies Registration Office
Turnover of €100,000
Showing Profitability in the last year
No UNPAID direct debits in your company bank statements
Since different lenders and loan types will have different qualifications, it’s in your best interest to do your due diligence on what they’ll require before you apply for refinancing a business loan. Having everything gathered and ready will help you get through the application process even faster so you can obtain funding quickly. How much does it cost to refinance a business loan? The cost of refinancing business loans will also depend on the lender and loan type you’re applying for. Ultimately the goal of refinancing a business loan is to save you money – so be sure to evaluate the different costs that can play into the process, such as:
Origination fees – a fee that a lender may charge for processing your loan application
Prepayment fees – a fee some lenders charge for repaying ahead of schedule (this is meant to make up for the money they would’ve earned through interest)
Underwriting fees – a fee charged by some lenders for reviewing your loan application and confirming that all necessary info is provided by you
Legal fees – small businesses may need a financial advisor to help them evaluate and choose from the variety of loan options available (not free!)
Appraisal fees – providing security in the form of valuable assets may lower the total cost of refinancing a business loan, but the appraisal of those assets comes at a cost
If all of those fees and charges outweigh the benefit of refinancing a business loan, then perhaps you should reconsider your approach to handling your existing debt. Just remember: whether you decide to move forward with refinancing business loans or to proceed in another direction, you should always be aware of the fine print that comes along with either choice you make. Bottom line Refinancing business loans can make paying off your existing debt easier, but it’s not for everyone. Before you apply for refinancing a business loan, you’ll want to consider all of the points we’ve covered above. Take another look over the info provided here, and feel free to bookmark this page for future reference. Plus, if you know any other small business owners who may be having a tough time managing multiple loans, you can share this page with them too!
Disclaimer: The information contained in this article is provided for informational purposes only, should not be construed as legal advice on any subject matter and should not be relied upon as such. The author accepts no responsibility for any consequences whatsoever arising from the use of such information.