These days it’s rare to find a small business that hasn’t taken on some form of debt to get started or get to the next level. Financing is almost a necessity at some point, and in many cases, a business obtains it under less than favorable circumstances.
Small businesses that don’t have an extensive credit or operating history are often forced to obtain financing at high interest rates or with inflexible terms. After a while, it can become a burden on cash flow, making it difficult for the business to grow or even survive. That’s when it’s time to consider refinancing.
When It’s Time to Refinance
Refinancing is simply the process of replacing one or more loans with a new loan, presumably (hopefully) with a lower interest rate or more flexible payment terms. It should only be done when it can reduce the debt burden on a business, meaning it should save money. Assuming your business has grown since its original business loan, you may be in a better position to obtain more favorable terms. You know your business is ready for refinancing if:
You’re Still Paying High Interest Rates
If you took out your loan when your business was less established, chances are you are paying a high rate of interest. Just in the last few years, the competition for small business financing has exploded with dozens of new players, especially in the online lending space.
Lenders such as LendingClub, OnDeck, Kabbage, and Fundera cater to small businesses and rely less on credit history than on other factors that indicate the repayment capabilities of a business. If you have several years of operating history and annual revenue that exceeds $250,000, you may be able to qualify for their better rates.
Your Credit Has Improved
You felt lucky to get your last loan, regardless of how much it is costing you. If you have been making on time payments and been building your credit history, you may be ready to try for a more traditional business loan with a bank. It can be a more involved process, taking as long as six weeks to get approval and funding, but the terms are likely to be much more favorable.
If you are at that point, your best bet would be to apply for a Small Business Administration (SBA) loan which offers the best loan terms around. Again, more paperwork and a longer processing period, but if you’re in it for the long haul, an SBA loan is the best way to finance a small business.
The Small Business Loan Outlook
This is the perfect time to consider refinancing your business loans. Interest rates are still hovering near their all-time lows, but they are expected to inch up in the near future. The competition for small business loans is heating up, which means it’s a much more accommodating environment in the business lending space.
Even traditional banks, which had all but abandoned small business lending after the financial crisis, are aggressively pursuing creditworthy small business owners. If you are ready to refinance, you now have more options than ever.
Traditional Bank Business Loans
They’re back and many are offering some very good refinancing deals for creditworthy businesses. It makes it worth the extra effort to put together a business plan and a loan request package. The biggest concern of traditional lenders is that your business has the capability of repaying the loan. You have to be able to show them how your business is expected to make money and grow. To make it worth your while, you should apply with an SBA-designated bank, but expect a longer and more involved process.
Online Lender Business Loans
Online lenders are aggressively expanding their reach in the small business marketplace. They do this by offering a quick and easy application and approval process. Once you are approved for a loan (usually within hours of submitting your application), it is typically funded within a few days. However, for that convenience, you can expect to pay a higher rate of interest. Still, if your business has grown since your last loan and you are projecting strong revenue growth, you will likely pay a lower rate than your previous loan.
Steps to Successful Refinancing
Not every business can qualify for refinancing. However, the better prepared you are and the more financially stable your business, the better your chances of a successful refinance. Whether you choose to refinance through a traditional lender or an online lender, you need to take the time to prepare and then follow specific steps that can improve your chances of obtaining lower cost financing.
Get Your Financial House in Order
You need to demonstrate to lenders that you can run your business and that it is fully capable of repaying a loan. It’s time to take all measures to shore up your cash flow – reduce expense, tighten up your receivables process, lock down customer agreements, etc.
You will also need to get your personal financial house in order. Most lenders will either require a personal guarantee or a good credit score from the business owner. You may need to spend several months working on both to present the best possible financial picture.
Know Your Lender
You should research several lenders – traditional and online – to learn their requirements and their loan options. You’ll need to know if collateral or a personal guarantee is required; the available loan terms; criteria for loan qualification at different rates of interest; repayment terms, etc. Ideally, you should only deal with lenders who work with similarly situated businesses in your industry or market.
Create Your Business Plan
Most online lenders don’t require you to submit a business plan, but you will still need to provide them with evidence your business is qualified for a loan. Traditional lenders, including those that offer SBA-guaranteed loans, do require a business plan that includes a marketing and sales strategy, financial projections, and management background.
Whether you plan to approach a traditional lender or an online lender, putting together a well-conceived business plan is essential for any business that hopes to get to the next level.
Do the Math
You need to run the numbers to determine if the refinance will improve your financial position. This includes accounting for any prepayment penalties on your existing loan and any new fees associated with the refinance. Your biggest concern should be the impact the refinance will have on your long-term cash flow. If you get locked into a longer term loan that doesn’t lower your interest costs significantly, you may run into cash flow problems down the road.