Can You Refinance a Business Loan? What to Know

Refinancing a business loan involves replacing an existing loan with a new one, typically to secure more favorable terms. Similar to refinancing a personal mortgage, the new loan pays off the balance of the old one. The aim is often to achieve better interest rates, adjust repayment schedules, or gain other benefits that align with the business’s current financial standing. Refinancing can be pursued with the existing lender or a new financial institution.

Reasons for Refinancing

A primary motivation for refinancing a business loan is to secure a lower interest rate, which can significantly reduce the overall cost of borrowing and monthly payments. If market rates have decreased or the business’s financial health has improved, a lower rate may be available. This can free up capital for reinvestment or operational needs.

Extending the loan term is another common reason to refinance. A longer repayment period can lower monthly payments, improving cash flow and making debt more manageable. While this might lead to more interest paid over the loan’s life, reduced monthly outlays can offer substantial financial flexibility.

Businesses might also refinance to change the loan type, such as converting a variable-rate loan to a fixed-rate loan for more predictable payments, or vice versa. This shift can align the loan structure with the business’s risk tolerance and financial planning. Consolidating multiple business debts into a single new loan can simplify financial management by combining several payments into one. This can also lead to a lower blended interest rate and streamlined accounting.

Preparing for a Refinance Application

Before initiating a refinance application, gather comprehensive financial information. Lenders require detailed business financial statements, including profit and loss statements, balance sheets, and cash flow statements, often for the past two to three years. These documents provide a clear picture of the business’s financial health, allowing lenders to assess revenue, expenses, assets, and liabilities.

Business tax returns for recent years are commonly requested, alongside personal tax returns for owners, particularly for smaller businesses. Recent business bank statements, usually covering the last several months to a year, are important to demonstrate cash flow and liquidity. Details of the existing loan, such as original terms, current outstanding balance, payment history, and any potential prepayment penalties, must also be available.

A business plan or future financial projections may be needed to illustrate the business’s strategic direction and repayment capacity. Key considerations before approaching lenders include the business credit score, a significant factor in loan approval and terms. For many small businesses, the owner’s personal credit score is also relevant, as personal guarantees may be required. If the new loan will be secured, information about available collateral, such as equipment or real estate, and its valuation, will be necessary. Defining the new loan’s purpose helps lenders understand the strategic intent. Business owners should determine their desired loan terms, including interest rate, repayment period, and payment structure, to guide their search.

Navigating the Refinancing Process

After documentation and financial preparations are complete, identify potential lenders. Businesses can explore various options, including traditional banks, credit unions, online lenders, and Small Business Administration (SBA) lenders. Researching each lender’s requirements and experience with business refinancing is advisable.

The application submission process involves providing prepared documents and information through an online portal, directly to a loan officer, or via a loan broker. Lenders then begin the underwriting and review phase, which includes a detailed examination of the business’s financials, creditworthiness, and any proposed collateral. Lenders may request additional information or clarification during this stage.

Once underwriting is complete, the business may receive loan offers outlining proposed interest rates, fees, repayment terms, and specific covenants. Compare these offers to ensure the new loan aligns with refinancing goals. Final steps involve closing the loan, signing legal documents, establishing the new payment schedule, and arranging for the original loan’s payoff.

Common Refinancing Options

Term loans are a frequent choice, replacing an existing loan with a new term loan that features different interest rates or repayment periods. These loans provide a lump sum repaid over a fixed term with regular payments.

Lines of credit offer flexibility, allowing businesses to refinance an existing loan into a revolving credit facility. This provides access to funds as needed, up to an approved limit, with interest charged only on the drawn amount. Small Business Administration (SBA) loans, such as the SBA 7(a) loan, can also be used for refinancing existing business debt. SBA loans often feature government guarantees, which can lead to more favorable terms.

Equipment refinancing involves replacing a loan secured by specific business equipment. If the business has equity in its equipment, this can lead to better rates on the new loan. Commercial real estate loans can also be refinanced, allowing businesses to adjust mortgage terms on commercial properties. This can secure a lower interest rate or extend the repayment period for real estate holdings.