Small business loan refinancing: What you should know

Key takeaways

• Business loan refinancing can help you save money with lower interest rates or lower monthly payments

• Compare loan offers to ensure that you're getting a better deal by refinancing

• You can refinance using a variety of business loans that you then use to pay off the current loan, including term loans and SBA loans

According to the Federal Reserve, small business loan amounts average around $663,000, but lenders offer loan amounts ranging anywhere from $500 to $5.5 million or more.

But with interest and other fees, borrowing can costs balloon, especially if your business didn’t initially qualify for competitive rates. Thankfully, refinancing your business loan may help save money — provided you can score a lower rate with a new lender. Here are the ins and outs of refinancing, including when to refinance a business loan and what factors to consider before refinancing.

What does it mean to refinance a business loan?

Refinancing allows you to find another lender offering a lower interest rate or more favorable terms. You use the funds from your new loan to pay off your old loan, and then you stick with the payment schedule set by your new lender.

The U.S. Small Business Administration reports that over 33 million small businesses exist nationwide. According to the 2022 Small Business Credit Survey, 72 percent of employer firms held outstanding debt to cover expenses like the rising cost of goods and improve cash flow.

Not every business qualifies for the lowest interest rates, so many owners turn to short-term business loans or alternatives. These loans, and even traditional business loans, can be expensive. It isn’t uncommon to see interest rates above 30 percent for alternative lenders or those with bad credit.

When you refinance, you may qualify for a lower interest rate, a lower monthly payment, less frequent payments or an extended repayment period.

A lower interest rate can help you save money, but if you extend your repayment period without lowering your interest, you may pay more over time. Balancing these two can be difficult, so research to determine if refinancing is right for your business.

Types of business loans that can be refinanced

Provided you and your business qualify, almost any type of business loan can be refinanced. The most common loans to refinance are term loans, equipment loans and microloans.

• Term loans from banks or alternative lenders could come with higher interest rates if you borrowed when your business was new. If you have since improved revenue and your credit score, you may qualify for a lower rate.

• Equipment loans are generally secured by the equipment you purchase. If you want to swap to an unsecured option, refinancing with a bank or online lender allows you to keep your equipment and potentially secure better terms.

• SBA loans are government-backed loans issued by lenders that are approved by the Small Business Administration. SBA loans offer low interest rates and long repayment terms of up to 25 years. As the SBA sets maximum interest rates that lenders can charge, you may score more favorable terms on your business loan refinance.

• Microloans are small loans intended for startups and underserved communities. Like standard term loans, you may get a lower rate if your business has grown or your finances have improved from when you first borrowed.

Refinancing vs. debt consolidation

Your financial goals dictate how you choose to tackle your business debt. The two are similar, but debt consolidation replaces multiple loans — potentially from different lenders and with differing terms and interest rates — with a single loan from a single lender.

Both refinancing and debt consolidation are effective ways to decrease debt. However, if you are seeking relief from the high cost of a single business loan, debt consolidation is not an option. You will need to refinance. Otherwise, knowing the differences between the two can help with your decision.

When to refinance a business loan

Refinancing can help you better manage your business debt, but it’s not always the best option. Ask yourself a few questions to decide when to refinance your business loan.

• Are average business loan interest rates lower than my current loan?

• Have my personal and business credit scores improved?

• Has my business’s annual revenue increased?

• Can I manage my business loan repayments in my current budget?

• Can I get a lower monthly payment by refinancing?

• Do I need lower monthly payments to free up capital to use elsewhere?

• Will refinancing help me pay off the business loan sooner than currently expected?

Pursuing refinancing may be worthwhile if you can answer these questions and have a clear goal in mind. If you are already struggling to make payments, it may be best to talk to your current lender to see if there is a way to renegotiate your terms rather than refinance.

Compare lenders and determine your potential savings before committing to refinancing — and press pause if you wouldn’t get a better deal.

Pros and cons of refinancing a business loan

There are benefits and drawbacks to every business loan. A lower interest rate allows you to save money and improve cash flow. But if your personal and business circumstances haven’t changed since you initially took out the loan, lenders may offer you similar — or even higher — rates.

Pros

• Lower interest rate or monthly payment

• Better terms to improve cash flow

• Shorter loan term could lead to faster repayment

Cons

• Potential prepayment penalty on current loan

• Rates may not be competitive

• Lengthy application process for each lender

How to refinance a business loan

The process of refinancing a business loan is similar to the process of getting a business loan. If the loan application is approved, take your time and carefully review the terms and conditions before moving forward.

Confirm your remaining loan balance

Review and confirm your remaining loan balance to determine how much you still owe. At the same time, request a payoff quote. This is the amount you need to pay off the existing business loan, including interest that will accrue on the principal between the quote and the payoff date.

Both pieces of information should be available online or by contacting your lender.

Set a refinancing goal

Once you have your payoff quote, determine what your goal for refinancing will be. Ultimately, you will either be lowering the total cost of your debt, lowering your monthly payment or a combination of the two.

You can lower your monthly payment by extending your loan term or getting a lower interest rate. However, extending your loan term could potentially increase the total cost of your loan since it gives more time for interest to accrue.

To lower your monthly payment and the total cost, you will need to refinance at a lower interest rate.

Check credit

Next, you’ll want to review your credit score and history, as most lenders will check your credit. Knowing your credit score can help narrow down what loans and lenders you qualify for and whether you need to build up your business credit.

Compare lenders

When looking at lenders, you’ll want to research their eligibility criteria. Lenders often set requirements for:

• Minimum credit score

• Time in business

• Annual revenue

Research and compare lenders to determine your best option. Between banks, credit unions and online lenders, you have quite a few ways to refinance your business loan.

If available, prequalify to preview your rates. This lets you see if the loan will be worthwhile for your business. And throughout the process, remember that your terms may be based on your personal and business finances. Every lender has its own requirements, so research these thoroughly before applying.

Gather required loan documents

Most lenders have similar business loan requirements that must be met. To demonstrate your business can repay your loan, you will likely need to have a low debt-service credit ratio (DSCR) and provide quite a bit of information, including:

• Accounts receivable and accounts payable

• Balance sheets

• Bank statements

• Business insurance

• Business license

• Commercial lease agreement

• Driver’s license or other photo ID

• Employee identification number (EIN)

• Payroll records

• Proof of ownership

• Financial projections

• Tax returns

Bottom line

Refinancing a business loan can be a smart move for many business owners. To get started, find a lender that offers refinancing. As long as you score a lower interest rate — or at least a lower monthly payment — it may be worth the time and effort it takes to apply.

Frequently asked questions about business loan refinancing

• Can business loans be refinanced?

  Yes, business loans can be refinanced either with the same lender on your current loan or a different lender. In either case, you will essentially use the new loan to pay off the previous loan. You’ll want to notify the lender that you’re using the new loan to pay off debt.

• Can you refinance an SBA loan?

  In most circumstances, the SBA does not allow you to refinance a loan it has guaranteed. Your lender must be unwilling to modify the terms of your current loan if you want to refinance, and you will need to document why you need additional capital or a loan modification to qualify.

• When is the ideal time to refinance a business loan?

  Business owners should refinance when they can secure a lower interest rate and monthly payment. Review your personal and business credit score and your business’s annual revenue and cash flow. A lender will use these factors to see if you qualify for a lower rate.