Operating a small business can be challenging in today’s economic clime, especially when large loan payments start to cramp your cash flow. If you find yourself struggling to manage your monthly overhead, you might be considering whether it’s time to refinance your loan to allay the stresses associated with carrying a heavy debt burden.
Before all else, can you refinance a small business loan? Yes, you can. In fact, there are several compelling reasons to consider refi on a small business loan, as long as you meet the eligibility criteria. One of the primary advantages is the potential for a reduced interest rate, which can translate into significantly lower monthly payments.
However, the benefits are not limited to lower payments alone. Refinancing also gives you access to additional cash for company expansion or covering new expenses. It lets you extend or improve loan terms, providing flexibility and potentially helping you avoid a significant balloon payment in the near future.
Key Takeaways
- Refinancing a small business loan can lead to lower interest rates and monthly payments, providing cash flow relief.
- It offers access to additional capital for expansion and improved loan terms, enhancing flexibility.
- Consider costs like title search, appraisal, credit report, and origination fees, along with market conditions, before refinancing.
- Businesses can optimize growth by reducing costs, extending loan terms, or converting variable rates to fixed.
- Consult experts like New Bridge Merchant Capital for guidance in making informed refinancing decisions.
Evaluating Your Business Loan and Explore Refinancing Options
When assessing whether to refinance business loans, examining the associated costs is essential. Here are some key points to consider when analyzing the expenses involved in refinancing:
Title Search and Insurance
Refinancing may require a new title search to ensure no liens or encumbrances on the property exist. Additionally, lenders often mandate title insurance to safeguard against potential property title issues. Costs for title search vary based on location and loan amount. They can range from a few hundred dollars to over a thousand dollars.
Appraisal Fees
Lenders often require a new appraisal to determine the current value of your property when refinancing a mortgage. Appraisal fees can reach tens of thousands, depending on the value and complexity of your commercial improvement.
Credit Report Fees
During the refinancing process, lenders may charge a fee to pull your credit report. These fees typically amount to around $25 to $50 per borrower. But these charges aren’t usually assessed until closing.
Prepaid Interest
When refinancing, borrowers usually have to pay interest on the new loan from the closing date until month-end. The prepaid interest amount depends on the proposed rate and loan size. The cost isn’t massive. It generally equals a few hundred dollars for an average loan.
Loan Origination Costs
Similar to the origination fees incurred during the initial loan acquisition, refinancing generally involves loan origination fees. These fees cover processing and underwriting costs and are calculated as a percentage of the loan amount. Origination fees range from 0.5% to 1% of the loan amount. Be sure to check with your lender for a quote.
Closing Costs
Comparable to home purchasing, refinancing comes with closing costs like application fees, attorney fees, document preparation charges, and miscellaneous expenses. Closing costs often span from 2% to 5% of the loan amount and can vary substantially between creditors.
Third-Party Fees
Additional third-party charges may arise during refinancing. These include expenses associated with county mortgage recording, obtaining a new survey, and courier services. The costs can vary based on individual refinancing circumstances.
Some lenders offer “no-closing-cost” refinancing options. Though these loans eliminate or reduce upfront costs, they usually entail a higher interest rate. Remember to evaluate the long-term cost implications of a business refi loan before making a final decision.
Maximizing Growth Potential With a Business Loan Refi
Business loan refinancing offers a range of opportunities for driving business growth by providing loan term flexibility, including interest rate, monthly payment, and repayment options.
One primary benefit of refinancing a business loan is the potential to reduce its overall cost or monthly payment. Refinancing to secure a lower interest rate can lead to significant savings over the loan’s duration, as it reduces the amount of interest accrued.
Various strategies exist for lowering your monthly payments. While reducing the loan’s interest rate might not always be feasible due to creditworthiness and market conditions, extending the loan’s term can spread repayment over a longer period.
Aside from cost reduction, another compelling reason to refinance is to change the type of business loan. For instance, refinancing enables the conversion of a variable interest rate line of credit into a fixed-rate term loan. This modification offers businesses stability and predictability in their repayment schedule, making budgeting and financial planning more effective.
Business loan refinancing can help you strategically re-configure and optimize your existing loan structures. If done right, this approach can help secure lower interest payments through new terms or extend loan terms and switch between loan types for increased stability and predictability. Refinancing can present an invaluable opportunity to boost financial efficiency and drive additional revenue growth.
Making an Informed Decision on Your Business Loan Refinance
When considering a business loan refinance, you’ll have to make an educated decision that can save money and offer additional benefits to your company, such as improving cash flow through lower monthly loan payments.
Interest rates on loans are not under your control. They are influenced by factors like the federal funds rate set by the Federal Reserve. When market rates fall, loans become cheaper, especially those tied to the prime rate and Secured Overnight Financing Rate. If you initially acquired the loan during a high-rate environment, and the market has since declined, refinancing could be an effective way to cut costs.
Lenders heavily consider credit scores when determining loan interest rates. Both personal and business credit scores hold weight for business loans, although small business lenders predominantly evaluate personal scores. If you have improved these scores since obtaining the loan, refinancing at a lower rate could be a possibility, even in a higher-rate environment.
Lenders primarily focus on underlying risk and the likelihood of loan repayment. Companies perceived as riskier generally face higher interest rates. However, if your business has enhanced its profitability since securing the loan, refinancing can potentially lower your payments to help you present a reduced risk profile.
The age of a company is also a significant risk factor. New companies often face higher loan costs due to limited experience and lack of payment history. If your company has successfully operated for a few years following the initial loan, you can demonstrate a reliable repayment capability and potentially qualify for lower loan costs when refinancing.
Evaluating the different lenders is crucial in the refinancing decision-making process. Traditional banks normally offer lower rates but may demand a longer time-in-business requirement compared to online lenders. If your business has recently passed the two-year threshold, exploring refinancing options with banks can be advantageous.
Look at factors like market rates, credit score improvements, enhanced business revenue/profitability, and time-in-business, to establish the feasibility of refinancing your business loan. Determine if you can advantage of alternative lenders like New Bridge Merchant Capital for additional cost-saving opportunities.
When Should You Pause on Refinancing a Business Loan?
While refinancing can be beneficial under various circumstances, there are situations when it may not provide significant advantages and could even result in increased costs.
If market rates have risen since the loan was secured, obtaining a new loan at a lower rate might be challenging, irrespective of improved credit or business financials. Refinancing under such circumstances could potentially lead to higher costs.
Rates have been on a consistent upward trend in recent months, with the Federal Reserve implementing multiple rate hikes throughout 2022 and 2023. Therefore, if you acquired your loan within the past few years, it may not be the most ideal time to consider refinancing unless you can lower your payment through some other method.
Should your personal or business credit scores decline from the time the loan was obtained, qualifying for similar interest rates may be difficult. In some cases, a significant decrease in credit score might even hinder qualification altogether.
Lenders pay close attention to a company’s revenue and profitability. If the business experiences stagnation or declining profits, it raises concerns. Securing favorable interest rates during refinancing becomes challenging under such circumstances. The creditor may require collateral or impose a blanket lien on your business assets as additional security, or it could reject your refinancing application outright.
Remember to monitor current market rates, credit score changes, and the overall health of your company before deciding to refinance a business loan. If market rates have increased, credit scores have dropped, or the company’s revenue and profitability exhibit negative trends, waiting for more favorable conditions might be wise. This approach will help avoid incurring additional costs and potentially unfavorable terms associated with refinancing in not ideal situations.
Is Refinancing the Solution for Your Business?
Are you wondering when is the right time to refinance your business loan? Deciding to refinance requires careful analysis of market trends, interest rates, and your company’s financial well-being. Always consider potential savings, cash flow improvements, and long-term objectives of your refinance.
At New Bridge Merchant Capital, our seasoned business lending consultants can provide valuable insights to help you navigate the process of how to refinance a business loan.
To get started, fill out an application online now or contact us today at 844-228-0593 to learn more about today’s business loan refinance terms and pricing. The New Bridge Merchant Capital team is ready to help you secure a stronger financial future for your business.
