Refinancing is when you apply for another loan with a lower interest rate and longer repayment term compared to your current loan. Most of the time, refinancing is done to consolidate your current loans, like credit cards and lines of credit. Or it can restructure one larger loan. This will give your business more flexibility as the repayment amount will be lower from now on. Refinancing will lengthen the term of your loan though. This can be done even if your current loan has not yet reached its maturity.
Reasons to Refinance
Reduce monthly payments
Locking in low interest rate
Avoiding balloon payments.
Types of Loans Eligible for Refinancing
Not all business loans can undergo refinancing. Here is the list of loan programs eligible for refinancing:
Working capital loans
Real estate loans
Business lines of credit
Merchant cash advances
Refinancing Rate and Terms
The objective of refinancing is to ease off repayment rates and to have an extended loan term to have a much lower repayment scheme. If you are going to refinance, make sure that interest rates are lower than your current rates and the loan term is longer. This will get you the lowest amount of repayment every billing cycle.
Listed below are the ideal parameters of refinanced loans:
1. Bank refinancing rate- 5-10%
Bank repayment terms- 1-10 years
2. SBA 7(a) refinancing rate- 4.5- 6.5 %
SBA 7(a) repayment term- 7-25 years
3. SBA 504 refinancing rate- 4.5-6%
SBA 504 repayment term- 10-20 years
4. Alternative refinancing rate- 9-50%
Alternative repayment term- 4 months to 5 years
Is Your Business Eligible To Qualify For Refinancing?
Similar to other loans, refinancing has certain requirements and it may differ from one lender to another.
Common requirements are the following:
High credit scores
Some factors may cause problems in refinancing a loan:
Poor credit score
Not enough time doing business
Not meeting your annual revenue
Refinancing is not as simple as it may seem. Although the idea and purpose of it may look like it may not affect anything, it can actually prolong the hardship of the borrower in repayment of their debt. It can also affect your future loans. Because lenders know the purpose of refinancing, this may cause your credit score to go down. Also, fees for processing and surcharges will also be charged.
The benefit of this is that you can consolidate your current loan through the proceeds you receive with refinancing, thus reducing the load of debts and you can still pay it off earlier than the projected maturity date to save you even more money and effort. It’s very important to pay off your loan before its maturity date, as that will save your business tons of money that would have been paid to the lender in interest. What is important is to be sure that refinancing will help you rather than be a burden to you. Here are some points that you may consider:
- Your goals for receiving a new loan
- Fees and costs of refinancing your loan
- Business and personal credit score
- Credit report
- Requirements for collateral and personal assets
- Rate and terms of a refinance loan
Be careful before considering and compare wisely.