Can You Refinance a Commercial Loan?

Commercial loan refinancing involves replacing an existing commercial loan with a new one. This process allows businesses to adjust loan terms and optimize their financial structure. The purpose of refinancing is to use funds from a new loan to pay off an older loan, often leading to more favorable conditions.

Motivations for Refinancing

Businesses often pursue commercial loan refinancing to secure a lower interest rate. A reduced interest rate can significantly decrease the total interest paid over the loan’s life, leading to substantial cost savings and improved cash flow. This allows more capital to be available for other business needs or investments.

Refinancing also provides an opportunity to change existing loan terms. Businesses can extend the amortization period to reduce monthly payments, thereby improving liquidity and financial flexibility. Alternatively, shortening the loan term can accelerate debt repayment and result in overall interest savings.

Accessing equity from the property is another common motivation for refinancing. A cash-out refinance allows businesses to borrow more than the existing loan balance, providing a lump sum of cash at closing. These funds can be utilized for business expansion, property improvements, working capital, or acquiring new assets.

Consolidating multiple business debts into a single, more manageable loan is also a strategic reason for refinancing. This simplifies debt management by combining various payments into one, potentially at a lower overall interest rate. Additionally, businesses might refinance to convert between fixed and variable interest rates based on their market outlook and risk tolerance.

Lender Eligibility Standards

Lenders evaluate several factors when considering a commercial loan refinancing application, with borrower creditworthiness being a key factor. This includes assessing the business’s credit history and often the personal credit of guarantors or principals. A strong credit profile indicates a lower risk to the lender.

The Debt Service Coverage Ratio (DSCR) is an important metric lenders examine, representing a property’s net operating income relative to its annual debt obligations. Most commercial lenders require a minimum DSCR of 1.25x or higher, ensuring the property generates sufficient income to cover the new loan payments. A higher DSCR indicates greater financial health and can lead to more favorable loan terms.

Loan-to-Value (LTV) is another significant standard, comparing the loan amount to the property’s appraised value. Lenders set maximum LTV ratios, often ranging from 60% to 80%, depending on the property type and loan program. For cash-out refinances, lenders require the borrower to retain at least 20-30% equity in the property after the new loan.

The type and condition of the commercial property, such as office, retail, industrial, or multi-family, also influence eligibility. Lenders assess the property’s marketability and physical state. A stable business operation with consistent cash flow is expected to demonstrate the capacity for debt repayment.

Lenders also consider broader industry and market conditions, as these external factors can impact a property’s value and income-generating potential. While not directly controlled by the borrower, favorable market conditions can improve the likelihood of approval and loan terms.

Preparing Your Application

Preparing a commercial loan refinancing application requires gathering several key documents:

• Lenders require comprehensive financial statements, including profit and loss statements, balance sheets, and cash flow statements for the past two to three years. These provide insight into the business’s profitability, financial position, and liquidity.
• Business tax returns for the past two to three years are requested to verify income and expenses. Personal financial statements and tax returns for all guarantors or principals are also needed to assess their financial strength.
• Detailed property operating statements, including rent rolls, utility bills, and maintenance costs, provide a clear picture of the property’s income and expenses. Lenders use this to calculate net operating income and assess debt service coverage.
• Information about the current loan, including recent statements, terms, and payoff amount, is required. Comprehensive property information, such as deeds, existing leases, and prior appraisal reports, helps establish ownership and value.
• Legal documents, such as business formation documents (e.g., Articles of Incorporation or Organization) and partnership agreements, are needed. Licenses or permits pertinent to the business or property operation may also be requested.

The Refinancing Procedure

After preparing all necessary documentation, the initial step in commercial loan refinancing is the application submission. This involves submitting the complete package through a lender’s online portal or directly to a loan officer. The thoroughness of the application can influence the efficiency of later steps.

The submitted application enters the underwriting process, where the lender conducts a comprehensive review. Underwriters analyze all submitted documents, perform financial assessments, and conduct due diligence to evaluate the borrower’s creditworthiness and the property’s viability.

During underwriting, lenders order a new appraisal to determine the current market value of the commercial property. A Phase I Environmental Site Assessment (ESA) is also required to identify any potential environmental contamination or risks. These third-party reports are important for the lender’s risk assessment.

Following underwriting and third-party assessments, the loan undergoes a review by the lender’s loan committee. This committee makes the final decision regarding approval or denial of the refinancing request. If approved, the lender issues a commitment letter, which outlines the new loan’s terms, conditions, and associated fees.

Legal due diligence is conducted, involving a review of all legal documents and property titles to ensure clear ownership and identify any encumbrances. The process culminates in the closing, where all loan documents are signed, the new loan is funded, and the existing loan is paid off.