Refinancing a business loan may help reduce debt, free up cash, or simplify financial management.

  • Refinancing a business loan may reduce interest rates, lower monthly payments, or consolidate multiple debts into one.
  • Before refinancing, evaluate your financial position, credit profile, and current loan terms to ensure potential savings outweigh costs.
  • The refinancing process involves reviewing your existing loan, comparing lenders, and preparing detailed documentation.
  • Strong credit, steady revenue, and a healthy debt-service-coverage ratio (DSCR) may improve your likelihood of approval.
  • Choosing the right refinancing program may match the right type of loan and debt repayment with your business goals.

Individuals refinance personal loans to help tackle debt or to take advantage of better terms, but can a business do the same? Yes, many business loans that allow early payoffs may be refinanced. Let’s look at why and how to refinance a business loan.

Identify If Refinancing Is the Right Move 

Refinancing existing debt may be a good choice to help restructure a business’s finances. To refinance strategically, debt may need to align with a few different principles. Otherwise, it might incur extra costs without helping to solve the problem.

Signs Your Current Loan May Need Refinancing

Debt suitable for refinancing might fall into one of the following categories.

High Interest Rates

If a business takes out a loan with a variable interest rate, there’s a real possibility that the interest might increase over the life of the loan. Initial terms for variable interest loans may be beneficial to the business, but it may be a good idea for the business to refinance into a fixed interest loan once interest rates begin to rise. That way, the company may protect itself from further increases. Conversely, if interest rates start to fall, a refinanced fixed interest loan will preserve that lower interest term against future increases. 

In another scenario, business owners with less-than-ideal credit scores may also want to refinance once their credit score improves. A lower credit score may result in higher interest rates on a loan because lenders want to protect themselves against higher risk. A higher credit score might improve those terms in the business’s favor.

High Monthly Payments

If you’ve taken out a larger amount of money but paid down the principal, refinancing the remaining principal over more payments may help free up cash for other purposes. This requires careful consideration because refinancing like this may reset the term on the loan, causing you to pay more in the long run. 

However, a business on the precipice of expansion may decide that this type of refinance is worth paying a little more over time because the return from investing extra monthly cash into other goals is worth it. A thorough financial review, including a cash flow analysis, may make the decision easier. 

Multiple Loans

Companies struggling to manage multiple loans may also find relief in consolidating them. This combines everything into a single monthly payment with consistent terms and, in some cases, may reduce the overall amount of the payment. More predictability may help you qualify for other business financing as well because lenders often look for consistent revenue and strong payment histories.

Understanding the effect of refinancing multiple loans into one single loan is important here. A business that’s fairly close to paying off one loan may not want to extend its terms by wrapping it into a bundle with other newer ones. Additionally, a lump sum payment that’s more than the sum of the individual loan payments due to higher interest or less favorable terms may not create net positive terms for business goals either.

Common Disqualifiers for Refinancing

If a loan does match one of the characteristics above or other features making it suitable for refinancing, it might be a good idea to explore refinancing. However, businesses still have to qualify for refinancing loans to make it work. Initiating a refinance only to be told that it won’t be possible may be frustrating, so let’s explore some common things that might disqualify loans for refinancing.

  • Poor credit scores may prevent refinancing because lenders view borrowers like this as more of a risk.
  • High debt-to-income ratios might make lenders cautious, especially in consolidation situations. It might suggest the business is too overwhelmed to take on any new debt.
  • Insufficient revenue or blocked cash flow might signal to lenders that the borrower doesn’t always have the income available to make consistent payments or to repay the loan over the long term.
  • If your business hasn’t been open for long, lenders may decline to take on the risk due to a lack of credit history.
  • Previous loan defaults may also make refinancing more difficult. Many lenders want to see a positive history with debt, and that includes repayments. 

Other possible disqualifiers might include things like a weak business plan with financial forecasts that are unrealistic or even belonging to an industry typically considered risky. Those industries tend to fluctuate more strongly between booms and downturns.

Understand the Costs and Benefits of Refinancing 

Refinancing isn’t usually free. There are typically upfront costs associated with completing a refinance or long-term costs, but understanding whether those outweigh the potential benefits or not may reveal whether the refinance is the right move for you.

Potential Savings vs. Upfront Costs

First, let’s look at potential ways refinancing could save money and also the possible upfront or hidden costs.

Potential savings include:

  • Lower interest rate: A common reason to refinance is to reduce your interest burden. Even small reductions may significantly cut long-term costs.
  • Improved cash flow: A lower payment may help you reallocate funds toward payroll, marketing, or equipment purchases.
  • Debt consolidation: Combining multiple debts into one payment may reduce administrative overhead and simplify accounting.
  • Access to better terms: You may gain flexible repayment options, fewer restrictions, or more favorable loan covenants.

Upfront and hidden costs may include:

  • Origination fees: Many lenders charge around 1-5% of the loan amount for processing.
  • Prepayment fees: Some original loans impose fees for early payoff. Review your existing agreement carefully.
  • Appraisal or legal fees: If collateral is involved, asset re-valuation or filing costs may apply.
  • Short-term interest overlap: You might temporarily pay interest on both old and new loans during the transition period.

There’s no official formula for determining whether it’s better to refinance or not. Instead, weighing each of these possibilities carefully may help you decide which one will provide the best path forward for your business goals.

One possible benchmark is to calculate your break-even point, or how long it will take for the monthly savings from your new loan to exceed the refinancing costs. If that break-even point is towards the end of the loan life, it may make more sense to keep the current loan structure.

Map Out the Refinancing Process & Timeline

The refinancing process involves a few different steps. Here’s what you need to know to plan ahead and help smooth out the loan application process.

Step-by-Step: From Application to Approval

The loan process involves both applying for the loan and the review process from your lender.

Step 1: Review Your Existing Loan Documents.

It may be helpful to start by gathering all the details of your current loan situation. This includes the terms, payment schedule, and interest rates of all the loans you plan to refinance. Look at the loan payoff balance and factor in any prepayment fees, if there are any, to get your final total for the refinance or consolidation.

Step 2: Check Your Business Credit Profile.

The lender or bank will officially check the credit profile of your business, but it may save some time to know the credit profile ahead of time. Look for a reputable credit reporting company and review the payment history, credit utilization, and public records of the business to ensure everything is accurate.

If there’s a mistake, it may smooth the application process out to correct it before bringing the application to your lender. And if your credit score isn’t quite high enough to allow a refinance, you might make a plan to bring it up in the timeline you need.

Step 3: Clarify Your Refinancing Goals.

It may also be helpful to stop and consider what your goals are for refinancing. Knowing whether your business needs to lower monthly payments, reduce overall interest, protect from rising interest rates, or simplify debt may help the lender understand the situation and recommend a suitable loan structure.

Step 4: Compare Lenders and Loan Programs.

Different lenders may also have options for loan programs. Banks, credit unions, the Small Business Administration, and even online lenders might provide other terms or loan structures that benefit your business. 

Many times, businesses might check around for a few different loan choices. This provides flexibility, especially if a company needs faster processing times or a less common type of refinance. 

Step 5: Prepare Your Documentation.

It’s possible to walk into a bank or lender without any preparation, but a loan process might go more smoothly if everything is already together. Gathering documentation puts everything the business needs in one place, so it’s ready to submit once you decide on a lender.

Common documents include:

  • Business financial statements (balance sheet, profit & loss, cash flow)
  • Tax returns (personal and business) for the last two years
  • Business plan or growth strategy
  • Bank statements for recent months
  • Loan payoff letter or statement

This may not be everything the lender needs, but it might be a good start. 

Step 6: Submit Your Application.

After gathering the required documentation and choosing a lender and loan option, it’s time to submit the application. Carefully completing the required forms and including all the required paperwork may speed up the process and avoid any unnecessary delays.

Step 7: Underwriting and Review.

Once everything has been submitted, the lender will review the application to determine creditworthiness. This may include how well the business is performing, evaluation of existing debt structures, and any assets that may serve as collateral for the loan.

It’s common to have multiple follow-ups and further questions because the lender needs a lot of detail to say yes to the loan. Again, correctly completing the application and turning in the required documentation sets a good foundation for the loan process.

Step 8: Approval and Closing.

After you’re approved, you may receive the final paperwork outlining the terms of the loan. Once you read everything carefully one more time, you’re ready to sign. The lender may then pay off your previous loan or loans, and you may begin the payment schedule for the new one.

How Long Does Business Loan Refinancing Take?

Different loans and lenders will vary in timelines. It may also depend on the business’s credit situation and whether the loan is a traditional one with collateral or something else. 

To give you an idea of how much time it may take, typically, here are a few common timelines:

  • Online lenders: 3-10 business days for smaller amounts or unsecured loans.
  • Traditional banks: 2-6 weeks due to more rigorous underwriting and compliance checks.
  • SBA-backed loans: 30-90 days, depending on the lender’s queue and document verification process.

To minimize delays, respond promptly to lender requests and ensure all paperwork is accurate from the beginning.

Strengthen Your Application: Key Factors for Approval

How do you get approved for a refinance? You demonstrate that your business is credit-worthy, stable, and well-managed. Lenders want to know you’re able to pay back a loan because lending money might be risky. 

What Lenders Look For: Qualifying Criteria

A few factors to consider when applying for a loan.

Creditworthiness

When refinancing a business loan, both business and personal credit scores matter. In both cases, lenders are trying to evaluate how likely the business is to pay back the loan on time and without significant disruption. You may be able to talk to potential lenders about the threshold for minimum credit scores to be eligible for a refinance and check your report. If there are mistakes or it’s lower than you’d like, you have time to work on fixing it.

Debt-Service Coverage Ratio

Another thing lenders will check is your DSCR. This measures your business’s ability to service debt using operating income. Here’s the formula:

Formula: Net Operating Income ÷ Total Debt Service

A DSCR of 1.25 or higher is often preferred, but different lenders may have their own criteria. If your DSCR is lower, you might consider cutting expenses or increasing revenue before applying.

Time in Business

Newer businesses may be considered more risky than a company that’s been in business for a decade or more. Typically, lenders like to see at least two years of business operating history because this gives them a more complete picture of how stable the business is. Again, this may differ from lender to lender or depending on the business’s industry.

Industry Risk

And speaking of industry, certain ones may be considered more stable than others. Industries that fluctuate regularly or seasonally, such as hospitality or retail, might be flagged as more risky than other types of industry. While this isn’t an automatic red flag if you are in a risky industry, it is something to consider as you build your documentation for creditworthiness.

Revenue Trends

Consistent or growing revenues may signal financial health. So, lenders may ask for year-over-year comparisons as part of your overall documentation and financial portfolio to confirm a growing momentum. However, even if your business isn’t actively growing, documentation may still show signs of stability year over year, which may also be a suitable foundation for lending.

Collateral Value

For secured loans, you may need something to guarantee the loan. This could be equipment, property, or any other asset that appraises high enough to cover the loan amount if you do not pay it back. For businesses going this route, it might be helpful to take the time to conduct a new appraisal of the proposed collateral.

Cash Reserves

A lender may also want to see cash reserves over a certain threshold. This tells the lender that the business may be able to cover payments during periods of slowdown and that there’s enough liquidity to begin making payments once the loan is taken out.

Compare Refinancing Options for Business Owners 

Not all refinancing products are going to be the right choice for a company. The best choice depends on factors like business size, financial standing, and the purpose for refinancing. 

Matching Loan Programs to Business Goals

Where one loan option may not fit a timeline or a target interest rate, another could step in. For example, bank loans may offer longer repayment periods and better interest terms, but they may be risk-averse. They may also take longer to approve and pay out the loan. This option might be better suited to older businesses with larger cash reserves and better credit history. 

An SBA loan may also offer longer repayment terms and reasonable interest rates, but the documentation process may be rigorous. Online and alternative lenders might offer options for newer or riskier businesses, or for those with lower credit scores, but the trade-off might be higher interest rates and shorter repayment periods.

In each case, determining business goals and getting a clear financial picture may help make the decision easier.

Turning Refinancing into an Advantage

When businesses refinance a loan, they may be able to free up cash to invest back into the business, capture a better interest rate, or consolidate and simplify existing debt. With a careful review of your current financial picture and clear documentation, a business may complete the refinancing process with minimal delay and begin working on new goals.