Business Debt Refinancing & Consolidation
Are you paying off a loan that makes you cringe more with every passing monthly installment? If so, it may be time to stop the bleeding!
Read our basic guide to Debt Refinancing and do something about your borrower’s remorse.
What is Business Debt Refinancing?
Debt Refinancing is simply replacing an existing loan with another one that is better in some way. Whether it’s a lower interest rate, a longer term length, or more cash at the same rate, debt refinancing offers you an improvement.
How big of an improvement can you expect? That will depend on how your business or the economy has evolved since your existing loan began. But even minor improvements to your debt can offer cash flow benefits that are worth pursuing.
How Does Business Debt Refinancing Work?
When you obtain a new loan through debt refinancing, you’re paying off old debt with new debt. However, the whole point of debt refinancing is to get a better deal. If you get a new loan with lower rates, you save money. If you get a new loan with a longer term, you’ll pay less per month and free up cash to spend on other areas of your business. If you get a bigger loan, you’ll have more funds to grow your business.
When is it time to pursue debt financing?
First, has your business improved in any way since you obtained your current loan? Do you have higher annual revenue? Have you now been in business for over 5 years? Has your credit score approved? If you can answer “yes” to any of these questions, lenders may now see you as a less risky borrower. They may now be willing to offer you lower rates, longer terms or a higher loan amount.
Second, have interest rates dropped since you took on your current debt? If so, loans may now be cheaper. If you have the option to pay off existing debt at a cheaper rate (all else being equal), why not do it while you can!
Before starting the debt refinancing process, find out if your current loan penalizes early payment or closing with fees. If so, you’ll have to determine whether the benefits of a new loan offset the penalties.
Traditional banks, the SBA (Small Business Association) and alternative online lenders are the most common providers of Debt Refinancing. While banks and the SBA provide long-term loans with low rates, their requirements can be fairly strict. (See “How To Apply and Qualify for Debt Refinancing?” below.) But even if you can’t qualify for them, plenty of alternative lenders can offer you reasonable rates that are at least better than your existing loan.
Secure or Unsecured?
If your existing debt is secured, it is not uncommon for the new lender to require the same collateral. Consider how important this is to you when signing up for debt refinancing. Some lenders may be willing to loosen requirements.
Once you’re approved for a new loan, your existing loan is paid off completely. You’ll now begin making payments on your new loan until it’s paid off, or you refinance again. Keep in mind that nothing about the old loan actually changed. The old loan balance has simply been paid off by the refinanced debt.
(Making changes to existing debt is called Debt Restructuring, which we are not covering in this article. This practiced is generally reserved for desperate borrowers looking to avoid bankruptcy.)
Why Use Business Debt Refinancing?
If your business has improved since taking an existing loan, it’s time to reap the rewards! With a higher credit score, increased revenue, or simply more years standing, your business will likely now qualify for a better loan.
Consider the following pros and cons of debt refinancing:
Pros
Positive impact on credit score
Lower interest rates and/or monthly payments. Increased maximum loan amount
Help paying off balloon loans (short-term loans requiring large payment at end of term)
Improved Current Ratio (measure of your company’s liquidity and ability to pay current debt obligations within one year; important to banks when assessing your risk)
Change of loan type*
*Change from a fixed-rate loan to a variable-rate loan, or vice versa. If have a fixed-rate loan and interest rates have dropped, switch to a variable-rate loan so that your loan adjusts to the current rate. If you have a variable-rate loan, but want to lock into the current rate, switch to a fixed-rate loan.
Cons
Provisions (such as early payment penalties) on your current loan could offset any benefit of a new loan.
Continually refinancing short-term loans can get expensive. It can become an endless cycle of using debt to pay off debt.
Business Debt Refinancing Rates and Terms
Rates and terms vary by lender. Traditional banks should be your first choice, if you can qualify. Banks typically offer interest rates under 10%, with principal and interest payments scheduled monthly for around 10 years. Maximum loan amounts will vary with the size and revenue of your business.
The SBA (Small Business Administration) also offers favorable interest rates, starting as low as 6%. Loan terms can vary between 5-25 years, while the maximum loan amount can range from $5,000 to $5 million.
6-30%
Interest Rates
$5k – 5M
Loan Amount
650+
Credit Score
3 d+
Funding Speed
Finally, non-traditional lenders (often based online) offer alternatives to those who can’t qualify for bank or SBA debt refinancing. Note, however, that most of them offer short-term loans ranging from 3 months to 5 years. Given the short terms, expect higher interest rates, from 8% to as much as 30%. Maximum loan amounts from alternative lenders start around $20,000 and could go up to $500,000.
How To Apply and Qualify for Business Debt Refinancing?
While traditional banks may take a few weeks with the approval and funding process, alternative lenders can have money in your account within days.
Regardless, all lenders will want to see business bank statements and tax returns, profit and loss statements, an up-to-date balance sheet and debt schedule, as well as your credit score and other indicators of financial health.
To be approved for bank or SBA loans, you’ll need over 4 years in business, annual revenue above $150,000, and a credit score of at least 680. Nontraditional lenders will have looser criteria, but the less risky you appear as a borrower, the better deal you’ll get.
About Business Loans Consolidation
Do you have several loans that you wish to refinance? Loan consolidation may be the solution.
Loan Consolidation is the process of bundling multiple outstanding loans into one new loan. You get all the benefits of debt refinancing, while only having to worry about one monthly payment.
Is it high time for you to refinance bad loans? Contact us at Gateway to discuss Debt Financing or Loan Consolidation. We’ll help you find cash flow solutions that HELP—not hinder—your business!