How to Qualify for Refinancing Your Small Business Loan

Refinancing a small business loan or equipment loan can help you save time and money, but knowing when it’s time to refinance can be difficult. Business financing is a great tool to help you buy real estate, purchase equipment or inventory, hire  staff, get a startup off the ground, and more. With many small business equipment financing and loan options available, refinancing could also create exciting opportunities for your business to grow. So, how do you know when it’s time to refinance your existing loans?

In this article:

• How to know when’s the right time to refinance a loan.
• How to finance equipment and other small business purchases.
• How to refinance different types of small business loans.

When is the right time to refinance?

Whether you’re looking to finance equipment, buy real estate, navigate a financial emergency, or address another business need, refinancing can help free up liquidity.  A few strong indicators indicate it may be a good time to refinance.

Your qualifying conditions have changed

Many businesses seek equipment funding or other financing solutions when they’re relatively new. Rather than equipment leasing, it may have felt more prudent to buy construction equipment or take out a term loan to address several business needs at once.

Lenders consider a range of factors when making your loan application, but all of these factors may change over time. A small business’s financial profile when it first applied for a loan might be very different after it has put the loan to good use and carved out a stronger market.

Some of these factors that may have improved your financial profile include:

• Credit score: Credit scores change with time. An improved credit score may qualify a small business for a loan with better loan terms. Check your current credit score to see if there has been a material change since qualifying for your current loans. You can review your personal credit report once every year for free online (and sometimes more frequently). Business credit scores are available through a business credit bureau, like Dun and Bradstreet or Experian.
• Time in business: Lenders determine the start time of a business based on when the business bank account was opened or when the business was registered. Businesses that have been in business for more than two years may be eligible for new funding options. Some appealing refinancing options to established businesses include a bank loan with a traditional lender, one of many SBA loans backed by the Small Business Administration (SBA), or a low-interest term loan with an alternative lender.
• Increased revenues: Revenues that increase month after month raise the business’s net income , which can open doors for loan options with lower rates. Lenders may determine the creditworthiness of a small business by calculating the Debt Service Coverage Ratio (DSCR). The ratio is calculated by dividing the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) by the total debt service. Since increased revenues will affect EBITDA, the debt service coverage ratio will also increase. A better DSCR may open your business up to more attractive financing options.

Market conditions have changed

When you apply for financial services, not only are you subject to credit approval and business analysis, but some things are well outside your control. While your creditworthiness primarily determines interest rates, they’re also strongly informed by the federal funds rate or prime rate. Dictated by the Federal Reserve, this standard interest rate is often used as a base rate for many financing programs, including equipment financing solutions and other commercial banking loans.

If you want to finance equipment, for instance, refinancing loans when the national interest rates have gone down may free up additional cash flow to support a down payment for commercial equipment your business needs.

What are the benefits of refinancing?

There can be many benefits of refinancing a small business loan. Some of the most notable benefits often include:

• Improved cash flow: Refinancing existing debt can mean a lower interest rate and better repayment terms. Lower monthly payments equate to more available cash each month for your small business to finance equipment, offer healthcare benefits, ramp up marketing efforts, and many other business needs.
• Simplified accounting: Having more than one loan payment each month complicates bookkeeping. Recording principal and interest for a commercial real estate (CRE) loan, equipment financing, and a short-term business loan can leave accountants frustrated and confused. Consolidating multiple loan payments into one loan may be a reason business owners refinance.
• Future creditworthiness: Different types of financing have different impacts on your business’s credit score. For example, merchant cash advances (MCA) may be good options for new business owners or entrepreneurs with bad credit. These cash advances allow the borrower to receive a lump sum of cash that can be paid back using future credit card sales. However, too many high-interest, short-term loans over an extended period can cause future lenders to be concerned about the financial health of your organization.

Types of loans to refinance

Just about any loan can be refinanced, although it can be difficult with certain loans like CRE loans and SBA 7(a) loans. If you want to finance equipment and are already in a lease, a better equipment financing option may be transitioning from a lease into a purchase.

You’ll want to know what types of loans you have before searching for a loan program with better terms. Some types of small business loans that may qualify to be refinanced include:

• Term loans: Term loans are often used to make large purchases or supplement cash flow. They allow the borrower to receive a lump sum of money upfront with fixed repayment terms.
• Equipment financing loans: An equipment loan is used by a business to finance equipment, like commercial kitchen appliances or a forklift. The term of the loan corresponds to the asset's useful life, and equipment financing rates are often in line with standard loan rates.
• Business lines of credit: A line of credit is a type of revolving credit where the borrower can withdraw funds up to their pre-approved limit at any time. Payments on a line of credit are made only on the amount of funds drawn.
• Working capital loans: Working capital loans are used for ordinary expenses, like payroll, inventory, and rent. They are paid off with regular payments of interest and principal.
• Business credit cards: Credit cards are another type of revolving credit that many small business owners rely on; however, the interest rates can add up fast, and cards that carry balances near the limit can have a negative impact on a business’s credit score.

How to refinance your small business loan

Business financing is not something that should be taken lightly. Whether you are applying to refinance your first small business loan or a refinance loan, it is best to research the loan application process and prepare as well as possible. Following these steps can simplify the process of qualifying for refinancing your small business loan.

Calculate your costs

If you consider refinancing your existing small business loan or loans, you’ll first want a clear picture of your current debt. Refinancing only makes sense if your business’s financial health will improve as a result. This information will help you decide if it is a good time for you to refinance one or more of your existing loans.

• The total balance of existing business loans: You’ll want to know exactly how much money you owe on your current loans. This number will help you determine if refinancing that debt is a good idea and how much of a credit limit you’ll want. A loan that consolidates your current loans into a single payment is preferable to refinancing old debt effectively. You can find the current balance of loans on the monthly statement or  an online portal.
• Prepayment penalties: Some loans have prepayment penalties in the loan agreement. These penalties are fees for paying a loan off early. Prepayment penalties protect the lender from the loss of paid interest from prepayment or early payment. To find out if your existing loans have a prepayment penalty, check your original loan documents.
• The current interest rate: Take note of your interest rate  on all loans. You’ll want to know the percentage and if the rate is fixed or variable. A variable interest rate changes over time depending on the current market rate. When shopping for refinancing options, you may want to look for funding with lower annual percentage rates (APR).

Prepare documents

Once you’ve taken a detailed look through your current debt, you should start preparing for the loan application process. Every type of loan and lender has different requirements to finance equipment, get a term loan or other financing options. Regardless, this is some of the paperwork you should gather ahead of time, in addition to the details of your current debt, to expedite the approval process.

• Driver’s license or passport, proof of address
• Business credit history and personal credit score
• Income tax returns from the past 2 years
• Financial statements like income statements, balance sheets, budget
• Bank statements from business savings accounts and checking accounts
• Business plan and occupational licenses
• List of business assets
• Paperwork regarding any liens or other legal proceedings
• Proof of business insurance

Find the right lender

Choosing a business lender for your business needs can seem overwhelming, but it doesn’t have to be. You can refinance a loan through your current lender or with a new lender. The decision should be based on the customer service and financing options you are comfortable with.

Both traditional lenders like banks or credit unions, as well as online lenders, offer pros and cons. Since refinancing aims to secure better terms, you’ll want to compare information from at least two different lenders. Some details about your loan, like interest rates and down payment requirements, may not be available until you’ve applied or been pre-qualified with a lender. However, there is some preliminary information you can request, including:

• Customer reviews of the lender
• Types of financing available
• Interest rates, additional fees, closing costs
• Collateral and personal guarantee requirements
• Application and approval processes
• Available loan amounts

Complete an application

Once you’ve decided to refinance an existing loan and narrowed your search to one or two lenders, it is time to apply for refinancing. The application process will vary depending on the lender and type of loan. When you finance equipment, for instance, it may be a more simplified process than a more comprehensive loan consolidation.

Final Thoughts

It may be time to refinance your existing business debt if your credit score has increased, you’ve established significant time in business, you’ve increased revenues or the market conditions have improved. Properly refinancing business debt can improve cash flow, build better credit, and simplify accounting with consolidation. To start the refinancing process, look at your current costs, inquire about available loan options, and apply.

FAQs about finance equipment

Can you refinance a business loan?

Yes, you can refinance just about any business loan provided you can afford refinancing fees and you’re in good standing with your lender. You can refinance equipment funding, term loans, lines of credit, and many other loan types.

What are the benefits of refinancing a business loan?

Some of the benefits of refinancing include increasing cash flow to finance equipment purchases, supporting growth initiatives, and meeting business needs. It can also simplify your accounting if you have many loans to manage.

When should you refinance a business loan?

Some of the best times to refinance a business loan include when your credit score or business revenues have improved or when market conditions have improved to the point where you may be able to find a lower interest rate.

How do you refinance a business loan?

Whether you’re looking to finance equipment, purchase inventory, or handle some other business need, the process to refinance a business loan may be faster than getting a new loan. Like a typical loan application, you should research and compare lenders, prepare your documents, and apply online with your information.

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