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Betsy Wise
By: betsy_wise
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Business Loan Refinancing: Is It a Good Idea?

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Would you jump at the chance to keep your business growth on track? Most business owners would answer a resounding, “Yes.” What they don’t know is that the solution could be loan refinancing.

Unfortunately, elevated loan payments at higher interest rates and additional debts can bog down your cash flow. But there are alternatives: you can streamline your loan over a longer repayment period to have more working capital or pay down the loan over a shorter period to eliminate long-term debt. We are talking about loan refinancing. Maybe refinancing your existing loan hasn’t occurred to you as a viable option. But, what if it is?

What Is Loan Refinancing?

Loan refinancing allows you to repay your existing loans with funds that are sourced from a new lender. Your goal should be to secure funding that helps you to manage your company’s borrowings in a better manner.

Reasons to Refinance Your Loan

You took a giant step forward and got a loan so that your business could thrive. In doing so, your existing loan may have cost you more than you wanted to pay. Also, your business model may have changed so that loan refinancing makes sense. Here are reasons business owners take another leap of faith and refinance:

  • To Consolidate Debt: If you have several outstanding debt balances on credit cards, merchant advances or a short-term loan, you can pay off those accounts in exchange for a single loan payment.
  • To Invest Savings: When you refinance debt, borrowers look for repayment terms with a lower interest rate. You can invest the savings in new office equipment or software to improve the efficiency of your operations.
  • To Give Your Credit Score a Boost: Since you’ve been making regular and timely payments on your old loan, your credit score has probably improved. By consolidating debt, your credit score should go up again.
  • To Get Immediate Financial Relief: If you’re struggling each month to pay expenses, a lower payment takes the pressure off of your finances and you. You’ll be able to concentrate on other areas of the business like marketing your products or expanding operations.
  • To Change the Loan Type: If you’re paying a variable interest rate that fluctuates, you could switch to a fixed-rate loan that is less risky for your business.
  • To Obtain Additional Funds for Your Business: The financial institution refinancing your company’s loan may also offer to provide additional funds for your business.

 

Are There Any Disadvantages of Loan Refinancing?

Borrowers typically pay these costs when securing a new loan.

  • Transaction Cost: Lenders charge processing fees that may include documentation, funding, and closing fees. Depending on the loan amount, fees can average between 1-5 percent of the amount borrowed. In some instances, it may make sense to include closing costs as part of the loan amount.
  • Lengthy Process: On average, it could take 60-90 days or more to process a small business loan refinancing with traditional lenders. If you need financial help sooner and the lender denies the loan, you have to start over to secure funding. The goods news is Camino Financial can refinance a loan within 4 to 10 business days.
  • Prepayment Penalties: Your existing loan agreement may include a clause that a penalty is charged when you pay off a loan before the loan term. For example, a merchant cash advance in the amount of $50,000 at a buy rate of 1.2 requires that you pay $60,000 if you repay the advance before the due date. Camino Financial does not charge a penalty if you pay your entire loan balance before the maturity date.

What if you’re still on the fence about whether loan refinancing is right for you?

Loan Refinancing Needs to Make Sense for Your Business

Is refinancing your outstanding loans always a good idea? It really depends on your own situation. We’ll show you here 2 hypothetical scenarios where refinancing makes sense, but again, you have to carefully consider all the factors that come into play under your own circumstances.

Have it mind that if you are going to go to the trouble of finding a new lender, making a fresh loan application, providing your documents all over again, and then waiting for a reply, the entire process should give you a significant benefit.

These are the factors that you should consider when you weigh the pros and cons of refinancing your loans:

  • What exactly are you looking for? Do you want to reduce your rate of interest? Or is it more important to lower your monthly installment? Bear in mind that the two are not the same.
  • Are you making multiple payments every month to your lenders? Would things be simpler if you had to make only one monthly payment?
  • Are you looking for more funds? Refinancing your loan may give you the option of borrowing more. Let’s say your total borrowed funds are $25,000: your new lender may refinance this sum and also provide you with an additional $10,000.
  • Does refinancing involve any extra costs? If the refinancing fees or charges are significant, it could affect your decision.
  • What about the other terms and conditions? For example, your existing loan may carry a prepayment penalty. This may increase the cost of the refinancing option. Check on the other conditions too. For example, what is the late payment fee on your existing loan? Is the new loan’s fee higher?

Your decision to refinance should be based on taking all these factors into account. It’s possible that there may be some additional points that are specific to your business that you may need to consider as well.

Let’s try to understand how you should approach the issue of refinancing by considering two scenarios:

Scenario 1

Mateo runs a small construction firm. Some time ago, he took a loan of $30,000 at an interest rate of 2.5% per month. This was to be repaid over three years. $20,000 of the principal amount remains to be paid.

Now, there is an opportunity to refinance the loan at 2% per month. The lender also agrees to provide an additional loan of $10,000. The other terms and conditions including late payment fees remain the same. The repayment term for the new loan is three years.

Mateo summarizes the data:

Old loan New refinanced loan
Rate of interest 2.5% per month 2% per month
Original loan amount $30,000 $30,000 (old loan amount of $20,000 + an additional $10,000)
Monthly installment $1,273.55 $1,176.99

Should Mateo refinance his loan? His monthly installment is lower by about a hundred dollars. In addition to this benefit, Mateo will receive funds of $10,000 to deploy in his business. He decides to go ahead with the refinancing proposal.

Now let’s consider another scenario:

Scenario 2

Mariana runs a successful restaurant. She has been in business for over ten years. Recently, Mariana took a loan repayable over two years at a rate of 1.5% per month. The monthly installment on the $20,000 that she borrowed is $998.48. But she soon realized that she couldn’t make such a large payment every month.

She approached an online lender to refinance the loan. Within a few days, the new lender confirmed that her application was approved.

This is a comparison of the existing loan with the new offer:

Old loan New refinancing proposal
Loan amount $20,000 $20,000
Rate of interest 1.5% per month 2% per month
Number of payments to repay the loan 24 60
Monthly installment $998.48 $575.36

The new loan carries a higher rate of interest. However, the monthly installment is significantly lower, because the term of the loan is longer. Mariana decides to go ahead with the refinancing although over the term of the new loan she will be paying a total interest of about $15,920. That’s significantly more than the amount of $5,362 she would have paid on the original loan.

Why does she opt to refinance her loan? The lower monthly installment is the deciding factor.

Remember that before making up your mind about whether you should refinance your loan, it is vital to carry out a thorough analysis of your existing terms and the terms that the new lender is offering.

What Doesn’t Change When You Refinance?

  • Unless you add other debts to the remaining balance of your old loan, the loan balance stays the same. If you are in a position to allocate funds for a new business venture, you should add those funds to the new loan.
  • If you offered collateral as a condition to the old loan, a lender will most likely use the same collateral to secure the new loan. You may be able to negotiate an unsecured loan based on your repayment history, credit score, and other factors.

What Should You Expect When Refinancing a Loan?

By now, you probably have a good idea of whether refinancing makes sense for your business. To move ahead, set a date when you want to finalize the loan refinance. As already mentioned, consider that the refinancing process could take upwards of 90+ days. Now, you’re ready for the next steps:

Select a Lender: Your first choice may be to go to a traditional lender down the street to get the loan process started. But keep in mind they normally have stricter requirements because they deal with lower-risk borrowers. If you’re just building your business and your credit score, you may not qualify.

Should you then consider an SBA or Small Business Administration loan? Keep in mind this government agency doesn’t actually loan you the money. They work with banks to help small business owners secure financing when they don’t qualify for a traditional bank loan. A local SBA office can answer any questions you have about SBA loans, and you can also read this article about government loans for small businesses.

Online funding is a popular, alternative approach to lending. Requirements are not as stringent as traditional SBA loans; this simplifies the loan process substantially. After completing an online application and submitting the necessary documents, you can know within hours whether you’ve been pre-approved. You will also work with a financial specialist to figure out the best loan for your business.

It’s important to compare what each lender offers before you commit to a financial arrangement. The loan agreement needs to meet all of your business and personal goals.

Gather Necessary Documents: You’ll expedite the loan refinancing process by having on hand all the documents the lender needs. Here’s a helpful checklist.

  • Business and personal bank statements for the last 12 months. They give lenders a good picture of your income and expenses.
  • Business financial statements. They should include an income statement which shows your net profit or loss for a designated period. Your balance sheet indicates your assets and liabilities so lenders can determine if there’s enough income to pay off your debt. Lenders may also require a cash flow statement.
  • A list of personal or business property you can use as collateral if required by the lender.
  • Your personal credit report. Remember that you can get it for free. Make sure your credit history is up to date before you get a copy.
  • Other legal documents include a copy of your existing loan agreement, your business license and registration, and copies of leases for property or equipment. It’s a good idea to have a copy of your articles of incorporation if your business is an LLC or another type of corporation.
  • Some lenders may want to review a copy of your business plan.

Conclusion

Keeping your existing loan or deciding to refinance requires that you do your homework and make sure that loan refinancing is the best choice for your business. As you can see, it’s a time-consuming endeavor that offers both advantages and disadvantages.

Camino Financial offers online business funding options that only require a simple loan application. Loan amounts range from $5,000 to $400,000 and monthly interest rates between 1% and 2.5%. Camino Financial doesn’t require collateral to secure a loan. Most loans are approved and funded within 4-10 days- Keep in mind this: after you make timely payments on the business loan for nine months, it’s possible to get a loan with better interest rates and terms, so you don’t need to go through the refinancing process.  

Get started today! You can instantly know if you qualify for a business loan. In less than 24 hrs, a business loan specialist will get in touch with you to guide you through the rest of the loan process.

 

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