When to Refinance a Business Loan

many business owner borrowing money To help cover start-up costs, fund expansion, or cover unexpected shortfalls. The downside is that borrowing money means paying it back, which can be a drag on the company’s financial health.

Refinancing a business loan involves taking out a new loan to pay off an old one. It lets you adjust details such as the loan’s interest rate, monthly payments, and repayment terms. However, deciding when to refinance a loan can be tricky.

Why You Should Refinance a Business Loan

Refinancing Business Loans Means taking out a new loan and using that money to pay off the balance on the old loan. You can do this through your current lender or a new one.

Refinancing gives you the opportunity to change the details of your loan, such as interest rate, monthly payments and repayment terms.

The two main reasons to refinance a business loan are to reduce its overall cost or to reduce your monthly payments.

If you can refinance to a business loan at a lower cost interest rate, which often helps you save on loan fees in the long run. A lower interest rate means less interest accrues over the life of the loan.

If your goal is to reduce your monthly payments, there are several approaches you can take.

Lowering your loan rate is one strategy, but not always possible, depending on your creditworthiness and the current state of the loan market. Another option is to extend the loan term. This allows you to spread your repayments over a longer period of time. However, this increases the long-term cost of the loan by allowing more time for interest to accrue.

Another reason to refinance is to change Types of Business Loans You have.For example, refinancing allows you to become a credit limit Convert a variable rate to a fixed rate term loan.

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When to Refinance Your Business Loan

In general, you should consider refinancing when it can help you save money or provide your business with other benefits, such as improving cash flow by lowering monthly loan payments.

market interest rates fall

Loan interest rates are affected by a variety of factors, such as your company’s credit score and financial situation, but there is one major factor that is out of your control.

Interest rates on all types of loans rise and fall according to market forces.A major influencer in the interest rate market is the Fed’s fed funds rateThe Federal Reserve adjusts this rate, raising it to fight inflation and lowering it when the economy slows.

Loans tend to become more expensive when the federal funds rate is high. When it’s low, loans tend to get cheaper.This is especially true for interest rates linked to prime rate and the secured overnight funding rate, which moves in lockstep with the Federal Reserve’s interest rate adjustments.many SBA Loan Ratesfor example, with prime numbers.

If you took out a loan when market rates were high and rates were falling, refinancing may help you save money.

Your personal or business credit score improves

Most lenders weigh credit score and history heavily when determining a loan rate. Your credit score helps lenders determine whether you and your business can make your loan payments on time. A lower score translates to a higher interest rate as the lender tries to compensate for the risk of lending to you.

For business loans, your personal and business credit score Can influence interest rates (although small business lenders more often consider your personal score).if you have improved those scores Since taking out the loan, you may be able to refinance at a lower rate.

You have increased the revenue or profitability of your business

Lenders tend to care about one thing: whether you will pay back the money you borrowed. Lenders compensate for risk by raising interest rates, so companies that appear risky to lenders tend to pay higher interest rates.

If you take out a loan when your company isn’t making a lot of money, your business may look risky. Refinancing when you look less risky can help you lower your loan rate if its financial situation improves.

You get an initial loan in the early days of your business

Another major risk factor in the eyes of lenders is the age of the company. New companies, especially those that are only a few months or a year old, are huge risks. The owner may have limited experience and the business does not have a track record of making timely payments.

All of this translates into more expensive loans.

If you take out a term loan in the early days of your business, a few years of success can show your business is risk-free and reduce your loan costs.

Banks usually have lower interest rates and higher Business Hours Requirements than online lenders, so if you recently crossed the two-year threshold, try considering refinancing with a bank.

When to Delay Refinancing a Business Loan

Refinancing is a good idea in many cases, but sometimes it can cost you money without much benefit.

market interest rate rise

If market rates rise after you took out a loan, you may not be able to get a new loan at a lower rate, even if your credit or business financial situation improves.

This means that refinancing will only make your loan more expensive.

Lending rates are rising throughout 2022 as Fed approves big rate hike Six times in a row. If you took out a loan within the past few years, now might not be the best time to refinance.

Your personal or business credit score drops

If your business credit or your personal credit score has dropped after you took out the loan, it may be difficult for you to get a similar rate. If your credit score drops significantly, you may not qualify at all.

Your company’s revenue or profitability is stagnant or declining

If your business has less profits or less revenue, that’s a big red flag for lenders. You will struggle to refinance at a good rate. Some lenders may require you to post collateral or place blanket liens on your business assets. Or they may simply refuse to approve your application.

Should I consolidate my loans?

if you Multiple loans for your businessweighing the pros and cons of consolidating loans rather than refinancing individually.

Consolidation means taking a new loan and using that money to pay off multiple existing loans. You trade multiple loans and their corresponding monthly payments for one more manageable loan and payments.

When consolidating, you must consider many of the same factors as refinancing, such as whether you can get a new loan at a lower interest rate.

The main advantage is the simplicity of applying for a new loan and managing only one future loan.

But keep in mind that your existing loans may all have different terms. If consolidated, the terms of some loans may be extended and the terms of others may be shortened. This complicates calculating whether you’re saving money overall.you can use Business Loan Calculator Comparing results.

In general, consolidation is great if you’re looking for simplicity and lower monthly payments. Refinancing each loan individually can help you save even more money by allowing you to lower your interest rate while maintaining the current terms of each loan.

the bottom line

Refinancing your business loan can help you save money. Seek to refinance when you can lower interest rates on your debt or save money.

Refinancing to lower your monthly payments and improve your cash flow can be attractive, but increases your total cost of debt.If you’ve crunched the numbers and refinancing looks promising, check out Bankrate’s guide How to Refinance a Business Loan.