Small Business Loans: Is It the Right Time to Refinance?

Homeowners often consider refinancing mortgages for better rates or home renovation funds. Similarly, business owners can benefit from refinancing their small business loans. After all, improvements to a business can increase its competitive edge, and extra cash flow may go toward expanding the business or getting another start-up off the ground. The benefits of refinancing a small business loan are as diverse as the business owners themselves.

Unfortunately, owning a business does not make someone an expert in financing. The lenders are the ones who know the ins and outs of rates and terms and documents. To even out the playing field, it is important for a small business owner to ask the right questions and consider the following factors when deciding whether to refinance:

The Terms of the Existing Loan

A business owner must understand the existing loan in order to have proper perspective about the terms of any possible refinancing opportunities. Interest rates are a great place to begin comparisons. How competitive are the terms of the current loan? When did the business owner borrow? How much interest remains to be paid? Are there any pre-payment penalties?

The Costs of the New Loan

Fees are the name of the loan game. There are title fees, bank fees, appraiser fees, attorney fees, and more when loans are refinanced. Ongoing fees are also possible if a revolving line of credit is involved, and of course taxes (specifically mortgage taxes) add to the bottom line. An accurate assessment of fees and taxes will shed light on what the refinancing will truly cost (or save) in the long run.

The Financial Profile of the Business

If the company or its owner has poor credit, banks will be less inclined to offer the best refinancing options. The good news is that the SBA Advantage program uses an alternative scoring system to evaluate businesses, so it may be of use when a credit score has been tainted. Another factor to consider, however, is that applying for a new loan (especially an SBA-backed loan) requires an enormous amount of paperwork preparation. For example, SBA-backed loans demand three years of tax returns, one year of bank statements for both the owner and the business, and the business’s financial statements. Small business owners often don’t have time to dedicate to culling the necessary documents, nor do they have the money to pay someone else to do the accounting. It may be cost-prohibitive for a business owner to apply for refinancing.

The State of the Business and Its Industry

Bank loan officers are aware of the risk of newer businesses (over half of start-ups fail within the first five years) and usually offer undesirable higher rates on business loans to those companies. Refinancing is truly only in the best interest of a business that has matured past those five years and built a reliable financial history. If a business can demonstrate a mature financial track record, banks will be more willing to refinance existing debt for a longer repayment period. Longer repayment terms can rescue a business in an industry that is typically adversely affected by a recession.

The Fine Print on the New Loan

Low interest rates may make a loan opportunity seem like the life raft a business owner has been hoping for, but it is always best to be cautious if the offer seems too good to be true. There may be restrictions or penalties that have the potential to hinder the business or the owner’s business plan in the future. For example, is there a prepayment penalty on the new loan? Can the loan be assigned to a new owner if the business is sold? Will the lender limit how much the owner can invest in capital expenditures, or possibly restrict the owner from taking an additional loan from another lender? Will you be required to provide quarterly or annual audited or reviewed financials to the lender?

The most successful business people have learned that, while they can’t know everything, they will fail if they know nothing. Business owners should become as educated as possible about their current loans before approaching lenders; by combining loan knowledge with a list of hard-hitting questions for loan officers, a business owner can be confident that he or she is making the best refinancing decision for the company.