6 Practical Steps To Refinance A Business Loan

6 Practical Steps To Refinance A Business Loan

6 Practical Steps To Refinance A Business Loan

Refinancing a loan is an attractive way to optimize business operations. For example, let’s say the interest rates have dipped since you obtained your original loan, or your financial standing has improved, making you eligible for lower interest rates now. Or you may be planning to reduce your monthly repayments to better manage your cash flow. Whatever the motivation, refinancing a business loan is a process you must approach strategically. This guide will help you understand business loan refinancing and list the six powerful steps to refinance a business loan.

Refinancing a Business Loan: A Simplified Explanation

Refinancing a business loan is similar to refinancing a mortgage: You apply for a new business loan, which is used to pay off your old one, ideally replacing it with a more favorable deal. Your reasons for refinancing may include seeking lower interest rates, extending the repayment period, decreasing monthly payments, or attaining more flexible payment terms.

Though you may opt to refinance with your present lender, you also have the opportunity to explore alternatives such as traditional banks, online lenders, or an SBA loan. The terms of the new loan will be contingent upon the lender’s offerings, and your personal and business qualifications. However, keep in mind that your existing loan may have a prepayment penalty, and your new loan can entail additional charges like origination, underwriting, or SBA guarantee fees.

What is an SBA Loan?

Small Business Administration (SBA) loans are instrumental in empowering small businesses by providing them with the capital required for essential activities such as startup operations, expansion, equipment purchases, and hiring personnel. These loans fall under two main programs: the 7(a) Guaranty Program and the 504 Loan Program, alongside an SBA Express Loan.

  • 7(a) Guaranty Program: This program offers low-interest loans made available by SBA-approved lenders to eligible borrowers. Primarily, the program caters to small businesses under the control and ownership of socially and economically disadvantaged individuals, with loan guarantees backed by the U.S. government.
  • 504 Loan Program: This program is specifically tailored to small businesses that own real estate and are primarily engaged in commercial activities. The SBA 504 Loan Program provides substantial financial aid to these businesses.
  • SBA Express Loan: The SBA Express Loan serves as a swift, streamlined financing solution for small businesses seeking quick access to working capital. With this loan, small businesses can secure funding in a timely manner.

To be considered for these SBA loans, businesses must meet certain qualification requirements. These include:

  • Being a small business with fewer than 500 employees.
  • Operating for no more than three years.
  • Possessing a net worth of no more than $2 million.
  • Maintaining a positive monthly cash flow.
  • Generating a minimum of $25,000 in annual revenue.

By satisfying these criteria and obtaining credit approval, small businesses stand a chance to tap into the resources provided by these SBA loan programs, supporting their growth and sustainability in the long term.

Comparing Business Loan Refinancing to Debt Consolidation

While both business loan refinancing and debt consolidation serve as mechanisms to navigate debt management, they serve different purposes and lead to varying results. Refinancing a business loan entails a lender paying off your current loan and substituting it with a new one. This ideally results in a lower interest rate and decreased monthly payments, potentially allowing you to realize long-term savings.

Debt consolidation, on the other hand, involves merging several loans into a single payment. Therefore, this option helps streamline your loan management. While it could potentially offer a lower interest rate, the main goal of debt consolidation is to simplify the repayment process across various loans.

Advantages of Business Loan Refinancing

Refinancing your business loan can provide several potential benefits, such as improved cash flow, access to more capital, and long-term savings. However, your benefits will depend on how you utilize your refinancing loan and the new rates you qualify for.

For instance, if your current loan has an above-market interest rate, or if your business’s financial health has improved since you initially sought financing, refinancing could help you secure a lower rate. This, in turn, reduces your total borrowing cost and can help expedite your loan repayment.

Refinancing often involves obtaining a smaller loan than the original, leading to lower monthly payments. This frees up capital that can be used elsewhere in your business. If you’re juggling multiple loans and finding it hard to manage payments, refinancing can help you consolidate your debt into a single loan with one monthly payment.

Potential Downsides of Business Loan Refinancing

While refinancing can offer various benefits, it’s crucial to be mindful of potential drawbacks. For instance, refinancing usually involves new fees, such as origination and underwriting fees, and possibly prepayment penalties. The cost of these fees can accumulate, so it’s vital to ensure that the benefits of refinancing outweigh these costs.

You might not necessarily secure a lower interest rate or a better repayment schedule with your new loan, especially if market rates have risen or your credit score has declined. Keep in mind that applying for new financing that requires a hard credit inquiry could result in a temporary dip in your credit score.

Ideal Conditions for Business Loan Refinancing

Refinancing a business loan can be advantageous under these conditions:

  • Your credit score has improved

As one of the key factors lenders assess when reviewing an application and assigning an interest rate, a better credit score could qualify you for a lower interest rate or more favorable loan terms.

  • Your revenue has grown

If your business revenue has increased, it might make sense to refinance your loan to get a better interest rate.

  • You need to lower your current monthly payments

If your existing monthly payments are proving difficult to manage, refinancing for a longer loan repayment term can reduce your monthly payments.

When is Business Loan Refinancing Not a Good Idea?

  • The cost is prohibitive

If your current loan carries a hefty prepayment penalty or if the new loan initiation fees are steep, crunch the numbers first to ensure you’ll actually save money by refinancing.

  • Interest rates have risen

If the current interest rate climate is generally higher than when you obtained the initial loan, it may not be the right time to refinance.

  • Your credit score has worsened

If your personal or business credit score has recently declined, you may not be eligible for a competitive interest rate or favorable loan terms.

Types of Business Loans Suitable for Refinancing

The possibility of refinancing isn’t limited to just one type of business loan. As long as your business fits the lender’s criteria, refinancing is a feasible option. The following are some of the most frequently refinanced business loan types:

  • Business Term Loans

These loans offer a fixed sum, repaid over a given period. If your business has seen a rise in revenue or your credit score has improved since the initial loan, you might qualify for a better rate upon refinancing.

This kind of financing allows business owners to draw funds as needed, rather than receiving a lump sum upfront. It can be refinanced depending on your business’s financial health.

  • Working Capital Loans

Aimed at supporting short-term business costs like inventory, daily operating costs, or payroll, working capital loans can be refinanced subject to the lender’s stipulations.

  • Equipment Loans

These loans, designed for buying or upgrading business-related machinery or equipment, can be refinanced. Having equity in the equipment may result in a competitive rate, as it often serves as collateral.

  • Commercial Real Estate Loans

Much like a personal mortgage, the mortgage on your business’s property can be refinanced, allowing for better lease or purchase terms.

  • Short-term Business Loans

If your business needs quick cash for emergency expenses or other short-term needs, you can access a short-term loan. However, these can often be replaced by a loan with better terms via refinancing.

  • Microloans

For startups or underserved communities that need small amounts of capital, microloans are a feasible option. If your business has grown since the original loan was issued, you might qualify for a reduced rate upon refinancing.

Can an SBA Loan be Refinanced?

While SBA loans may appear more challenging to qualify for in comparison to other business refinancing alternatives, the SBA 504 loan program could present an affordable solution for some enterprises, despite its intricacies. However, your business should meet specific prerequisites.

Firstly, your enterprise should have been operational for a minimum of two years, and the debt you aim to refinance should also be no less than two years old. Furthermore, it is essential to substantiate that the initial loan was expended for a purpose approved under the SBA 504 program. This implies that your business utilized the funds for acquiring an eligible fixed asset like land, machinery, or owner-occupied real estate.

Your enterprise must also demonstrate a sound credit history with timely payments for at least the previous 12 months. Do note that the 504 program cannot be employed to refinance existing government-guaranteed loans.

A Six-Step Guide for Refinancing a Business Loan

Refinancing a business loan may appear to be a daunting process, but by breaking it down into these steps, it becomes manageable:

1. Identify your Loan Details

Begin by examining your existing loans. Compile a comprehensive list of the crucial elements for each loan, such as the type, outstanding balance, interest rate, monthly payment, and remaining number of payments. Having this information at your disposal will aid in the rest of the process.

2. Define your Goals

While the primary objectives behind loan refinancing are usually to lower the interest rate and monthly payment, identifying your specific goals will allow you to assess whether refinancing is suitable. Always balance your monthly savings against the potential increase in the total cost of the loan due to a longer repayment term.

3. Assess your Credit and Eligibility

Your personal and business credit scores, debt-to-income ratio, and business revenue and profit play a significant role in your chances of qualifying for a new loan. Ensure your financial status can withstand the scrutiny of potential lenders.

4. Collect the Necessary Documentation

When embarking on the process of refinancing your business, initiating a new loan application is key. To expedite this procedure, it’s essential to collect the necessary documentation pertinent to your unique situation. The specific requirements may vary from lender to lender, but the following components are typically standard in the industry and may need to be provided:

  • Verification of ownership or the relevant business license.
  • Your company’s Employee Identification Number (EIN).
  • Personal as well as business bank statements to display financial standing.
  • Both personal and corporate tax returns for the pertinent years.
  • Current balance sheets that show your business’s fiscal health.
  • Statements related to any existing loans.
  • Your well-crafted business plan outlining goals and strategies.
  • Information about collateral, if it’s required by the lender.

Gathering these documents, including other possible ones like proof of collateral and identification papers, will streamline the application process, saving valuable time. After identifying the most suitable business loan refinance for your organization’s needs, it’s wise to assemble all the required paperwork in advance. If you obtain approval for a business refinance, it is highly recommended to meticulously examine the contract to ensure it aligns with your business objectives and is indeed the most advantageous option for your company’s financial future.

5. Compare Lenders

Researching and comparing various lenders is essential. Your current lender might be a feasible option, or you could explore new avenues. To navigate through this complex landscape, consider the following options and aspects:

  • SBA Lenders: With the backing of the Small Business Administration, SBA loans may be more accessible, especially if you meet specific criteria like a good personal credit score. However, the SBA’s refinance criteria still need to be met, so researching their unique requirements is vital.
  • Online Lenders: For those in need of a quicker solution, many online lenders focus on flexibility, enabling access to funds within just a few days. This can be particularly helpful for those with limited or poor credit. But be cautious of potentially higher interest rates and terms that might be unfavorable. As with traditional lenders, compare their offerings to ensure compatibility with your needs.
  • Traditional Banks and Credit Unions: Often providing competitive interest rates and flexible terms, traditional banks and credit unions may be appealing choices. However, they might have stricter business loan requirements and an extended application process. It’s beneficial to compare their interest rates, fees, term options, loan amounts, and collateral requirements to find the best fit.
  • Existing Relationship with Your Lender: Don’t overlook the possibility of negotiating competitive terms with your existing lender. The established relationship might lead to more favorable conditions that align with your financial goals.

In each case, be aware of any hidden fees that might be lurking in the fine print. Alongside interest rates, pay close attention to extra fees, the payment schedule, qualification requirements, and any prepayment penalties that might apply. By meticulously researching and comparing these different lending avenues, you’ll be better positioned to find a refinancing option that best serves your business’s unique financial needs and long-term objectives.

6. Submit Your Application

Once you have identified the best business loan provider best suited to your needs, complete the application form and submit the necessary documentation. If your initial application is rejected, remember that you can always apply again after waiting for an appropriate period, typically around 30 days.

Refinancing your business loan can be a strategic move to improve your financial conditions, either by securing a lower interest rate or reducing your monthly payment. It’s crucial to have a clear understanding of your current loans, define your financial objectives, and assess your creditworthiness before embarking on the refinancing journey. Comparing lenders and having the necessary documentation at hand can streamline the process considerably.

Refinance Your Business Loan with the Help of Sunwise Capital

While the process of navigating business loan refinancing may seem daunting, partnering with Sunwise Capital can make the process much easier. We specialize in providing business loans and can guide you to make the most suitable choice for your business needs. Our loan specialists offer invaluable insights, ensuring you select a loan that best fits the financial landscape of your business. Book a consultation appointment with us today to learn more.


Mark J. Kane is a successful entrepreneur spending the last 16 years lending money to business owners. Beginning his career as a psychologist, at the age of 23 he became the youngest Hospital Admin running a 100+ bed facility. He built two businesses to over 500 employees and a business from scratch to over $18M in revenue in 18 months before selling. This experience led him to begin Sunwise Capital.

Category: Advice, Getting Money

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