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Refinancing Business Debt to Lower Interest Rates

By Spodek Law Group | February 20, 2024

Refinancing Business Debt to Lower Interest Rates

When to Consider Refinancing Business Debt

There are several situations when refinancing existing business loans or lines of credit may make good financial sense:

  • Interest Rates Have Dropped Significantly – If interest rates have fallen at least 2 percentage points below a business’s current rate, refinancing will likely lead to substantial interest savings. Even a 1% drop can add up to major savings over the life of a loan.
  • Improved Credit Score or Financial Position – A business that has significantly improved its credit score or overall financial health since obtaining its current financing may qualify for better refinancing terms from lenders.
  • Cash Flow Issues – Refinancing at a lower rate may help free up cash flow to reinvest in operations, make payroll, or have on hand for emergencies.
  • Debt Consolidation – Combining multiple higher-interest debts into one lower rate loan can simplify finances.

The Refinancing Process

The process of refinancing business debt is largely similar to obtaining a new loan:

  1. Determine goals – Calculate potential savings and decide what loan terms best meet your needs. Will a lower monthly payment or overall interest savings be more significant?
  2. Check credit score – Make sure your credit score is strong enough to qualify for today’s best rates on a refinance.
  3. Choose a lender – Compare offers from multiple lenders. Online lenders, banks, credit unions, and alternative lenders all offer financing.
  4. Submit application – Provide documents proving business financials and ability to repay.
  5. Close loan – Review terms, sign agreements, and obtain funds to pay off old debt.

What Debt Can Be Refinanced?

Many types of business financing can potentially be refinanced, including:

  • Term loans
  • Lines of credit
  • Equipment financing loans
  • Commercial mortgages
  • Business credit card debt

Benefits of Refinancing

* Lower monthly payments – If cash flow is tight, a lower monthly payment from a refinance provides flexibility.

* Interest savings – Even a small rate reduction saves money over months and years.

* Access to cash – If property value has increased since initial financing, a cash-out refinance utilizes that equity.

* Improved loan terms – Refinancing could mean adjusting the length of the loan, repayment structure, fees, and more.

* Debt consolidation – Combining debts organizes financing under a single payment.

Risks and Drawbacks

Refinancing also comes with some potential downsides to consider:

  • Closing costs – Lender, appraisal, recording, and other fees range from 2% to 5% of the loan amount. These upfront costs make sense to pay if the interest reduction saves money long-term.
  • Starting loan term over – Just like refinancing a mortgage, the loan term resets, delaying full repayment.
  • Rising interest rates – If rates trend higher in coming years, refinancing now locks in savings.
  • Missed contract provisions – Review original loan documents to understand if any terms or penalties apply to early repayment.

Tips for Getting the Best Refinancing Deal

Follow these tips to ensure you get the lowest rate on a refinanced business loan:

  • Shop multiple lenders – Having offers from several financing sources encourages lenders to beat terms.
  • Negotiate fees – Many lender fees are negotiable, potentially saving thousands.
  • Consider a shorter term – Paying a loan off faster means less interest paid overall.
  • Make a large down payment – Putting 20-30% down shows lenders you are sharing risk.
  • Pay for points – Points lower the interest rate but require an upfront fee. Calculate if worth it long-term.
  • Maintain great credit – Having a credit score over 720 unlocks today’s very best rates.
  • Bring in a cosigner – Adding a guarantor with better credit can mean better loan terms.

Alternatives to Refinancing

For businesses that may not currently qualify for refinancing at significantly improved rates, here are a couple alternative options:

  • Take out a small business line of credit – Lines of credit carry lower rates than credit cards and provide flexible access to funds.
  • Ask lenders about loan modifications – Some lenders may agree to tweak existing terms, like extending length of the loan to reduce payments.

The Bottom Line

  • With interest rates still hovering near historic lows, many small businesses can likely reduce the cost of financing through refinancing.
  • Lenders are eager to win new financing deals, so shop around for the best offers.
  • Just make sure the terms make sense for your business’s financial situation and goals.

Refinancing business debt requires weighing multiple factors but can pay off with thousands of dollars in interest savings if done right. Consult with accounting and legal advisors to decide if refinancing is the optimal move for improving your company’s financial footing this year.

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