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By Jeff White 

Refinancing debt in your small business can lower your APR, reduce the frequency of payments, and even unlock additional working capital. The most common loans used for business refinancing are SBA loans and small business term loans. In this article, we’ll show you how to refinance business loans in three easy steps.

When refinancing your business loans you’ll likely want the lowest rates with the longest repayment terms available to lower your monthly debt payments. SmartBiz offers SBA loans that fit this description, offering debt refinancing up to $350K with rates between 6-9% and repayment terms of up to 10 years. You can prequalify online within a few minutes.

How to Refinance Your Business Loans

The 3 steps needed to refinance your business loans are below:

Step 1: Prepare to Refinance Business Loans

When you prepare to refinance your business loans, you should create a clear goal and review your current debts and finances. Both your personal and business situation will determine what loans are available and how lenders will view your application. Having a clear goal will help ensure you’re applying for the best possible loan at the right time.

Refinancing too early could cost you a hefty amount of interest. Applying too late, on the other hand, may mean that you’ll miss out on being approved altogether.

Create a Clear Goal For Refinancing

It’s important to know what your primary goals are when refinancing business debt. Your primary business goals will help define what type of loan you need and what you’ll qualify for. Some of the reasons that people refinance a business loan include:

  • Reduce your monthly payments
  • Reduce total APR
  • Reduce total cost of capital
  • Allow for additional borrowing
  • Make payments more convenient (paid monthly instead of weekly or daily)

Understanding what your primary objective is when refinancing will help you pick the right loan and the right lender. With that information, you’ll be able to determine the minimum qualifications for approval as well as the process and timeline for application and funding.

Review Debts & Finances

A complete review of your finances will help you know how much you’ll need to borrow to complete your refinance, and whether or not you’re likely to qualify. There are 3 main things you need to do to understand your business’s financial position:

Review Your Existing Debt

To begin the review of your business and personal finances, compile a complete list of your existing debts. At a minimum, you’ll want a total balance of all debt owed as well as your total monthly debt payments.

The business debts that are most often refinanced are high-interest loans with daily or weekly repayment schedules. These loans include merchant cash advances (MCA), short-term loans, orsmall business credit cards.

You’ll want to gather the following information for each debt you owe:

  • Current Balance
  • Current Monthly Payment
  • Interest Rate or APR (APR Preferred)
  • Remaining Repayment Term
  • Prepayment Penalties
  • Repayment Frequency (Daily, Weekly, Monthly)

Gathering this information will help you know exactly how much debt you need refinanced. It will also help you prioritize the debt you want to refinance (i.e. putting higher interest loans or debt with daily payments first). Refinancing may also become less interesting to you if the amount of prepayment penalties on your current debts are too high.

Mihir Kroke - Refinancing Debt“Be aware of the terms of your current loans before you refinance. There may be prepayment penalties that you will have to pay when you refinance. Additionally, it is possible that with a short term loan you have agreed to repay a fixed dollar amount. This means that unlike a credit card, paying back the loan quicker does not necessarily save you any money. You will have to be approved for the entire fixed amount when you refinance.”

— Mihir Kroke of Able Lending

Add Additional Capital Needs & Estimated Origination Fees

While borrowing more than you need during a refinance might seem counter intuitive, it can be a good idea if it will prevent you from borrowing more short term debt later with higher interest. For example, if part of your goal for refinancing your small business debt is to also obtain additional working capital for your small business, add the amount you need to your existing debt total.

Once you have that figure, add in the estimated origination fees that will come with your refinanced loan. Nearly all long term business loans have an origination fee (paid to process a loan) of some kind. These typically range from 1% – 5% of the total loan amount. SBA loans may come with an origination fee, closing costs, and an SBA guarantee fee (as high as 3.5% of the total loan amount).

Knowing potential origination fees is important because a minor reduction in APR may not be worth the origination costs of the new loan. Similarly, spreading a term out by 5 extra months is not likely to lower your monthly payment in a significant way. As a general rule of thumb, you’ll want to see an APR reduction of ~5% and/or a repayment term extension of 12+ months for refinancing to make sense.

The equation to determine how much you need to refinance your business loans should look like this:

Equation to Determine Your Total Refinancing Amount

Current Balance Owed 
+ Additional Capital 
+ Origination Fees 
= Estimated Total Refinance Amount

Refinancing Debt formula infographic

Having the total amount you need will help you determine what consolidation loan will be the best fit for your business. It will also allow you to approach the lender looking well informed and prepared. And, believe it or not, first impressions are as important in small business financing as they are everywhere else.

You can use our refinance calculator to see how much you could save by consolidating your business debt.

Review Your Financials

Reviewing your own personal and business financials will give you a good snapshot of how likely you are to be approved to refinance your business loans. You can size yourself up against the minimum requirements of the loan provider to see if they are likely to consider you to be a strong enough borrower to get funded.

Here is a list of information you should review from your personal and business financials before applying to refinance your business loans:

Profit & Loss Statements

Your P&L statement will give your net operating income (which is your gross revenue minus your operating expenses). Your net operating income needs to be positive after refinancing or you’ll be wasting time and money going through the refinancing process.

Balance Sheet

Understanding your assets and liabilities, found on your balance sheet, will help you determine what collateral you might have to secure a loan. The information on your balance sheet can help you determine both your quick ratio and your working capital ratio, which are both used to assess your financial health. Additionally, many lenders will want to see a positive trend in gaining asset value.

Last 6 Months of Bank Statements

Your cash flow, including your daily balance, will clue lenders into how stable your business operations are on a day-to-day basis. Lenders typically require average daily balances of $1K, $5K, or $10K. Additionally, any overdrafts within the last 3 months could be a problem for the lender, or at the very least it could delay your application process while they understand it better.

Personal and Business Credit Scores

You’ll need a 680+ credit score to get the best loans with the best rates, which is typically an SBA loan. Your personal credit will be pulled with a hard credit inquiry, which can impact your score. That’s why it’s important not to apply to a lot of lenders at the same time, but instead you should focus on applying for targeted loans you know you can potentially get.

You should know your personal and business credit scores before you apply so you don’t waste your time. If you have red flag credit events, like a bankruptcy or a tax lien, it will be very difficult to qualify for refinancing or debt consolidation. Check both your personal and business credit scores for free through Nav.

Personal and Business Tax Returns

Most lenders will want to see at least the last two years of both your personal and business tax returns. These tax returns should show your lenders that your personal income is sufficient to cover your personal household expenses, and that your business is profitable.

Personal Net Worth

This is a good snapshot to show lenders that you’re financially sound as an individual, and that you potentially have personal assets that could be used as collateral. While collateral may not be required for the best loans, like SBA loans, it certainly helps your approval chances. A strong personal financial net worth goes a long way to lenders being more comfortable with the loan.

Calculate your Debt Service Coverage Ratio

One of the most important factors for a lender when considering a refinancing loan is your debt service coverage ratio (DSCR). DSCR represents your ability to make payments on your debt. Generally lenders are looking for a DSCR of 1.2+, meaning you have enough net operating income to afford to make payments on 1.2 times the actual debt payment you’ll have after refinancing.

If this seems a little complicated, don’t worry. You can download our free Debt Service Coverage Ratio Worksheet. With just a little information it will calculate your estimated DSCR for you.

Prime borrowers should qualify for an SBA loan, which will likely offer you the most affordable monthly payments of all refinancing options. If you’ve been in business for at least 2 years, are profitable, and have a credit score above 680, you may qualify for up to $350K with an SBA loan from SmartBiz. Prequalify online within a few minutes.

Step 2. Find the Right Lender to Refinance Business Loans

The lender you choose to refinance with will dictate the type of loan you qualify for, and what the terms of your loan will be. For small businesses looking to refinance business loans, there are typically two options:

  1. An SBA Loan
  2. An Alternative Term Loan

SBA loans are generally cheaper than alternative  term loans, and are more likely to help you save money on your debt payments through refinancing. SmartBiz offers SBA loans of up to $350K with rates between 6-9%. SmartBiz is our recommended SBA loan provider because you can get fully funded in as quick as 30 days, compared to as much as 120+ days with other providers.

The table below shows general loan terms and qualification requirements for both a SBA loans and alternative term loans.

Refinancing Loan Options at a Glance

 SBA LoanAlternative Term Loan
Credit Score680+600+
Business Revenue$100,000+ and trending up$100,000+
Time in Business2+ Years2+ Years
Time to Receive FundsTypically 45 – 90 Days1-2 Weeks
Time For Approval1 Week3-5 Days
Payback Time Period10 Years1 – 5 Years
Loan Amounts$30K – $5M$5K – $300K
APR6% – 9.5%5.9% – 25.9%
Origination Fee0 – 4% plus
SBA Guarantee Fee of 3 – 3.5%
on loans above $150K
0.99% – 6.99%

Step 3. Apply to Refinance Your Small Business Loans

People typically refinance using short-term loans, credit cards, or term and SBA loans. Short term loans and small business credit cards, which you may have experience applying for, have pretty easy applications that require very little documentation. Term loans and SBA loans that are used to refinance short term debt require more documentation and have longer underwriting processes.

Documentation Required to Refinance Business Loans

When refinancing debt in your business the lender will want to look at your financials in greater detail, including a longer history, than your previous lenders likely wanted.

Mihir Kroke - Refinancing Debt“Compared to consolidation loans, which have longer repayment terms, short term loan applications don’t require much in the way of past financial documentation. Because consolidation loans are trying to assess your ability to repay a loan over years, rather than weeks or months, they may require more documentation of financial history, like tax returns, P&Ls, and more.”

— Mihir Kroke of Able Lending

Required Documentation for Refinancing with an SBA Loan or Term Loan

SBA loan applications can take a very long time, in part because they require extensive documentation. Here is a general list of documents required for an SBA or term loan:

  • Business Financials (past two years)
  • Profit and Loss Statement (past two year and YTD)
  • Projected Financials (looking forward 1-3 years)
  • Ownership Information
  • All Business Licenses
  • Business Overview and History
  • All Business Leases
  • Loan Application History
  • Business Tax returns (past two years)
  • Personal Tax Returns (past two years.
  • Resumes of Owners

This does not include any SBA forms that you will have to fill out during the process. It also does not include additional documents needed for your specific financial situation (like if you own additional businesses or rental properties). You can read our full SBA loan application process guide to learn more.

SmartBiz completes a lot of the SBA loan application process for you, and they can help you get funded in as little as 30 days. With rates between 6-9%, terms up to 10 years, and monthly payments, they can help turn high interest headaches into a loan you can manage. You can pre qualify for up to $350K within minutes by filling out an online application.

Refinancing Debt in Your Small Business

Getting through the three step process isn’t the only important part of refinancing your business loans successfully. You also need to be aware of how the process is handled and the total cost of each step along the way. This includes knowing the difference between what it will cost you if you choose not to refinance compared to how much you’ll save if you do.

Here are a few tips that can help you succeed with your refinancing process:

Look at Other Cash Flow Solutions

If you’re looking to refinance your business loans because you need immediate cash flow relief, then look at what other solutions are available to you. This could make you think you don’t have enough time to wait for an SBA loan, because you need the money now.

Unfortunately, if you go down that path you may end up costing yourself more money by refinancing with a product that is more expensive than an SBA loan. You might be able to save some money immediately that will help you wait for the SBA loan process to complete, if you know where to look.

Some examples of these cash flow solutions include stretching out your payables or getting better terms from your suppliers.

Don’t Sign Up For Prepayment Penalties

Some of your current debt may have prepayment penalties, which you’ll have to pay when you refinance. If you’re now in a good borrowing position then you don’t want to have to make those payments again.

As your business grows and your cash flow improves, you may want to pay off your debt early. Make sure you won’t have to pay extra to do so by eliminating prepayment penalties for this next loan.

Make Sure You Refinance at the Right Time

It can be difficult to know when it’s the right time to consolidate your business loans. It essentially comes down to how much money you’re going to save by refinancing, and whether or not that savings is worth it right now. Some professionals don’t recommend consolidating multiple loans just to make the payments easier, but to first make sure that the cost will be significantly better.

Paola Garcia, Business Advisor at Excelsior Growth Fund, says:

Paola Garcia - Refinancing Debt“You should consider consolidating when the business is demonstrating a decent financial performance and both the owner and the business have a good credit score to be in a good position to negotiate new terms, interest rate and fees associated with the consolidation.

We don’t recommend to consolidating just to have all debt in a single debt instrument. This is unnecessary as most lenders require automatic ACH payments; which makes it easier to track and stay current on business debt payments.”

APR is The Best Comparison

Consolidation loans can be compared in a lot of different ways from repayment terms to the time it takes for you to get funded. However, the cost is typically the most important thing if you’re refinancing expensive debt. Calculating the APR of a loan is the best way to compare it to another loan.

APR (annual percentage rate) is the total cost of the loan, including both your interest rates and any fees that are involved. APR makes it more simple to compare loans instead of trying to calculate interest rates and individual loan fees, which can get confusing. You can think of APR as the universal language that most loans speak, which will help you understand the costs of any loan.

What makes SBA loans such a great refinancing tool is their low APR. For example, a loan through SmartBiz could carry an APR between 6-9.5%, while an alternative term loan could cost you as much as 25% APR or more.

Bottom Line

Refinancing debt in your small business can significantly reduce your monthly payments by reducing your APR and increasing the time you have to repay the debt. It may even be an opportunity to borrow additional working capital. SBA loans are typically going to be your best refinancing option due to their low APR and longer repayment terms than alternative term loans.

If you’re ready to refinance your high-interest business loans, SmartBiz can help. With rates between 6-9%, repayment terms up to 10 years, and monthly payment schedules, their SBA loans could be a game changer for your business. Prequalify online for up to $350K in just a few minutes, and get funded in as quick as 30 days.

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