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Refinancing a business loan can be a financial lifesaver for your company's financial health, but knowing when to make the move is critical. Whether you're seeking to lower monthly payments, improve cash flow, or capitalize on better interest rates, timing your business loan refinancing is everything.

Here are six examples of when you may know it could be the right time to refinance your business loan.

When is the Right Time to Refinance Your Business Loan?

If you’ve been in business for a while, you likely have one or more loans that could make sense to refinance. Perhaps you took them out when:

• Your business was new, and you didn’t have a solid personal or business credit history
• Your credit score was low, and you were forced to borrow money at high interest rates
• You sought financing at a time when interest rates were relatively high
• You desperately needed cash and agreed to suboptimal funding options

No matter the case, it could make sense to refinance a loan when it could save you money, improve the financial position of your business, and provide more favorable loan terms.

Here are some specific situations when refinancing a business loan could be beneficial.

1. Your credit scores improved significantly

When you apply for a loan, lenders use your personal and business credit scores to help determine your ability to repay it. It’s the same when it comes to refinancing. A higher credit score indicates that you will likely repay the financing, resulting in a lower interest rate on your loan. A lower credit score means that it's less likely you will repay financing, making you a riskier borrower. Lenders will charge you higher interest rates to address the increased risk.

An improvement in your credit history and related credit score could significantly lower the interest rates you pay on business financing. When your business and personal credit scores improve, it could be wise to consider refinancing, especially for loans with relatively long terms.

It’s always in the best interest of you and your business to monitor your credit score using an online credit monitoring service like Experian. Apply for refinancing when you experience a peak in your credit score.

Pro tip: If you’ve got multiple outstanding loans, paying off one in its entirety can potentially lead to a boost in your credit score. That boost could save you a significant amount in interest over time.

2. Your loan payments are too high

One of the most important reasons to refinance a business loan is high monthly payments negatively impacting business cash flow. Payments could be high for several reasons, including:

• Short loan term resulting in larger monthly payments
• You overextended on a high-interest credit line
• Your business and personal credit scores were low when you applied for a loan, forcing you to pay interest at high rates
• You were forced to seek expensive financing such as a merchant cash advance from a costly provider because you had higher-than-expected receivables

No matter the reason, you need cash to pay bills, grow your business, hire employees, purchase equipment, expand into new markets, or take advantage of short-term financial opportunities.

To help free up cash, you could refinance with a loan that:

• Extends the payment period (shift from a shorter-term to a longer-term loan)
• Lowers the interest rate
• Is better structured or comes from a lower-cost provider

A new loan could come with much more manageable monthly payments, freeing up cash for other purposes.

Tip: Check to see if a lump sum payment could trigger early payment fees on your old loans before refinancing a business loan.

3. Your business is growing

Another sensible time to refinance a business loan is during expansion.

Make it a point to regularly review your company’s financial statements. When you experience a long period of sustained growth, it could be a smart time to refinance your loans.

As with credit scores, lenders will examine your profit-loss calculations when determining your creditworthiness. That means a long-term improvement in revenue and bottom-line results could translate into lower interest rates and better terms on your business loans.

Related: How To Refinance A Loan For Your Business

4. Your current loans could benefit from consolidation

Perhaps you’ve taken out multiple business loans and types of financing, such as:

• A start-up loan or new business microloan
• A cash advance after an emergency
• Crowdfunding to start your business
• Credit cards
• Equipment loans
• A business line of credit
• A mortgage on your business property or a loan for renovations
• Long- and short-term loans for different purposes

It can be challenging for busy entrepreneurs and other business owners to manage these debts and make timely payments. Missing a single payment can harm your credit score and reports, which could result in higher interest rates on future loans.

If your finances are complicated and it’s affecting your ability to keep the books, you could consider refinancing business loans into a single consolidated one with a higher loan amount.

5. You achieve a business milestone

Hitting certain milestones can allow your company to qualify for types of loans and terms it wasn’t eligible for in start-up mode.

Some examples include:

• Relatively low-interest Small Business Administration (SBA) loans are only granted to companies that have been in business for two years. (Be aware that SBA loans come with other restrictions.)
• Reaching $100,000 a year in revenue will make certain lenders view your business as a better credit risk, opening it up to more favorable interest rates and loan terms
• Having a certain number of dependable repeat customers also sends positive signs about business stability and viability to financial institutions
• Both traditional and non-traditional lenders view achieving a significant number of consecutive profitable months positively
• Achieving a specific staff size is another way to qualify for better financing
• Improving your credit score to where you can qualify for advantageous lending

Your borrowing possibilities increase once you’ve reached one or more of these milestones or other similar positive ones.

Achieving them means it could be a great time to refinance. Not only do some milestones make your company eligible for loans they may not have qualified for in the past, they also provide concrete evidence of your business’s success, which can make it more appealing to lenders.

6. The markets and economy improve

This one is beyond the control of small business owners, but better market conditions can save your business money. It’s worth it to pay close attention to market and economic conditions.

In times of economic growth, you may be able to secure a refinanced loan at a lower interest rate. When the economy is strong, small business owners are more likely to have the positive cash flow required to repay loans.

Pro tip: Economic health in your specific industry could also benefit your business when it comes to getting loans. If research or reporting indicates that companies like yours are doing well, you might have better loan options.

The Bottom Line on Refinancing Business Loans

Refinancing can help you gain greater control over your debt, grow your business, and take advantage of other opportunities. What’s critical is that you do your due diligence to find the best new business refinancing options for your enterprise.

Frequently Asked Questions (FAQs) About Business Loan Refinancing

What is the most common reason small businesses refinance loans?

Many business owners do so to consolidate several loans, to make bookkeeping and loan repayment more straightforward and more effective. Others refinance because current market conditions allow them to qualify for lower interest rates.

What credit score do I need to achieve for refinancing to make sense?

A good benchmark credit score is 700. Once you have a score above that, you can typically expect financing at lower interest rates and better repayment terms. However, other factors influence the interest rate decisions made by lenders, including years in business, industry, business results, and whether you have a sound business plan.

I have a lot of outstanding loans. How do I refinance business loans?

It simplifies bookkeeping and gives you greater control over loan repayment. If you shop around, you may be able to reduce the amount of interest you pay each month. Doing so could provide additional working capital to run your business.

Who are the best refinance lenders?

There are many lenders who refinance business loans, so there isn’t one overall best option. The best business refinance option is the one that matches your financial needs.

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