Loans, especially those for starting or running a business, are almost always a huge source of stress. Whether you’re starting a business, hoping to expand one or attempting to save one from drowning, simply keeping up with payments can put a strain on even the most fiscally disciplined entrepreneur. While your principle amount is set in stone, some borrowers might have the option of refinancing their loan(s). Refinancing means placing your current debt under new terms. This can be a good option for your business loan if one of the following three scenarios applies to you:
- New interest rates are lower than your current rate.
- The new loan repayment period is shorter.
- You can consolidate your debts into lower interest debts.
Keep in mind that refinancing is a great option, but usually only if it results in reducing business costs. For example, will you be able to keep up with higher interest payments even though your loan term will be shorter? Or will you end up paying more total interest by consolidating your loans instead of paying them off as-is? These are important points to consider before pursuing refinancing.
To help you decide whether refinancing might be right for your business, carefully go through the following steps.
1. Review Your Current Loans
Look into all of your current commercial loans, and review your payment amounts, interest rates and the length of time remaining on them. If you’re very close to paying off your loans or have lower interest rates than your lender is currently offering, then refinancing might not be worth it.
2. Consider Your Goals
Ask yourself, “Why do I want to refinance?” Pinpoint these reasons, and highlight the goals that refinancing might help you achieve. Then weigh the pros and cons against other financial options that may also help you reach your goals. Commercial loans are just one source of funding for businesses. Depending on your type of business or current needs, you might better serve your company by seeking outside investors or by broadening your credit.
3. Know Your Lending Options
Investigate your loan options by communicating with multiple lenders and comparing their offerings. There’s more than one provider for business loans, and their respective terms will vary based on a number of variables. Again, keep your business goals in mind, and calculate how each of your options would position you financially.
4. Collect and Evaluate Your Financial Records
Get your paperwork in order, including tax returns, audits, your organization's financial history and your business plan. If there are any potential red flags from your financial history, be ready to defend them. If you’re in a situation where your personal credit is financing your business, then you should also address this before proceeding.
When creating your business plan, be sure that it has the following:
- An executive summary that demonstrates how the bank will benefit under the new terms. Keep the executive summary brief, and be sure to note that refinancing will provide an improved cash flow as a result.
- If applicable, show how your collateral is more valuable than it was back when you originally submitted a loan application. This may put you in a better borrowing position, but it won’t work unless you can back up your claims with relevant documentation.
- Evidence showing that the market for your business is strong.
- An outline of the projects you have planned for the next two to three years, and how they will contribute to improved cash flow.
- Financial documents and/or tax returns from the past three years.
- Information about the executive members of your team. Entrepreneur and business coach Rob Garibay says, “Smart investors invest in people, not ideas.” Show that your team is worthy and that they are the right people to make the business a success.
5. Appraise the Collateral
Have an appraisal prepared to demonstrate the value of the property you wish to refinance. If the property’s value has diminished since the initial loan, then ensure that you have additional equity that will enable you to qualify for refinancing.
6. Compare Current Financial Situation With Potential Refinancing
For both of these possibilities, be sure to calculate the total potential outcome and perform break-even analyses first. When determining if you should refinance a business loan, make sure to include all financial situations and information. Then, calculate all possible scenarios, the outcomes for each, and make your decision accordingly. Additionally, consider other refinancing options, such as paying more than is required each month, which can reduce your debt sooner and reduce the amount of interest payments overall.
I Understand What’s Required, but I’m Still on the Fence
That’s understandable, as you want to be smart about how to pay for your business. Whether or not you decide to refinance, you should always regularly evaluate the terms of your loans. The state of your business’ market and the overall economic climate change regularly, as does your business, so make sure you’re in the best possible financial situation at all times. Perform regular calculations and checks to ensure that you’re in a financial situation that helps you achieve your goals. If refinancing can put your business in a better situation, it might be worth considering.
Also, keep in mind that loans and their terms are based on your relationship with lenders, so make sure to always maintain an active and healthy relationship with them. The lender will only trust you if he or she believes that you will run the business profitably. Therefore, if you choose to proceed with refinancing, you will need to again demonstrate that you and your business are worthy of the requested financing. The lender will only be willing to refinance your loans if it is evident that your business deserves it. The best cases for refinancing are made by businesses that have maintained a good payment history, have been professional in their dealings with their lenders and can make a convincing case that refinancing will be beneficial and conducive to the health of both the lender and the borrower’s businesses.