How to refinance a business loan

If you took out a loan when your business was just starting up, it’s likely that you’ll now have access to a wider range of business financing possibilities than you did back then. 

Since applying for your original loan, your business may have grown and become more established, you may have built up a business credit history, and you may even have some collateral to put down for a new loan. 

As a result, your business is likely to be much more attractive to lenders and you’re more likely to get accepted for more competitive business loan rates and terms, making now a good time to refinance. Here, we explain all you need to know about refinancing a business loan. 

How does business loan refinancing work?

When you refinance a business loan, you simply take out a new loan to repay your existing one. 

There are many benefits to doing this. For a start, it could allow you to take advantage of lower interest rates, making your new loan much cheaper than your existing one. Alternatively, refinancing could enable you to choose a longer loan term and reduce your monthly payments, or it could allow you to borrow more to improve your cash flow.   

Refinancing can also enable you to consolidate or combine a number of different loans into one loan with one lender and a single monthly payment. This can make managing your business finances much easier. 

Why should I refinance a business loan?

One primary reason to consider refinancing is to obtain more favourable loan terms, such as a lower interest rate, longer repayment period, or improved repayment structure. By securing better terms, you may be able to reduce your monthly payments, lower your overall borrowing costs, or improve your cash flow.

Additionally, refinancing can provide an opportunity to consolidate multiple debts into a single loan, simplifying your debt management and potentially reducing administrative burdens. Refinancing may also allow you to access additional funds for business expansion, investment opportunities, or working capital needs. By tapping into your equity or getting a larger loan amount, you can fund growth initiatives and take advantage of new opportunities that arise in the market.

Furthermore, refinancing can help you restructure your debt to better fit your business’s current financial situation and long-term goals. Whether you’re seeking to reduce your debt burden, extend your repayment term, or improve your debt-to-equity ratio, refinancing can provide the flexibility to adjust your financial strategy and optimise your capital structure.

Is refinancing right for your business?  

To decide whether refinancing is right for your business, it’s worth asking yourself the following questions…

• Is your business in a good financial position? Has your business credit score and revenue improved since applying for your first loan? If the answer is no, it may be worth waiting a while longer before refinancing.  
• Is your personal credit score up to scratch? Lenders may look at both your business credit score and your personal credit score before deciding whether to let you borrow. 
• Why are you refinancing? Will refinancing enable you to take advantage of lower interest rates, smaller monthly payments or a longer repayment term? If not, it may not be worth refinancing.
• Will you have to pay a fee for refinancing and how much? You may have to pay an application or origination fee of 0.5% to 5% for your new loan as well as an early repayment fee for paying off your existing loan ahead of schedule. Make sure you factor these in to see whether refinancing is still cost-effective.

Not sure whether you should refinance? With our refinance calculator you can estimate the savings and costs associated with refinancing.

What do I need to consider before refinancing a business loan?

Before refinancing a business loan, it’s important to carefully consider several factors to make sure it fits your financial goals and circumstances. Firstly, evaluate your current loan terms and compare them to the potential terms offered by refinancing. Consider factors such as interest rates, repayment terms, fees, and any prepayment penalties associated with your existing loan.

Next, assess your financial situation and cash flow to decide whether refinancing will improve your overall financial position. Consider how refinancing will impact your monthly payments, borrowing costs, and ability to meet other financial obligations. Additionally, review your business’s creditworthiness and credit profile to decide your eligibility for refinancing and the potential interest rates and terms you may qualify for. A strong credit history and financial performance can improve your chances of securing favorable refinancing terms.

It’s also essential to assess the costs and fees associated with refinancing, including origination fees, closing costs, and any other expenses. Calculate the total cost of refinancing and compare it to the potential savings or benefits to decide whether it’s a cost-effective option for your business.

In general, make sure that you fully understand the terms of the refinanced loan and how they will affect your business in the long run.

How much will it cost me to refinance a business loan?

When considering refinancing a business loan, it’s important to understand the related costs. Refinancing typically incurs various expenses, including origination fees, closing costs, prepayment penalties, administrative fees, and potentially higher interest rates.

The total cost will vary based on factors such as the size of the loan, the lender’s fee structure, and the specific terms of the new loan. It’s a good idea to carefully review the loan agreement provided by the lender to assess the total cost of refinancing and compare it to potential savings or benefits. Additionally, comparing offers from multiple lenders can help find the most competitive terms and minimise costs.

5 steps to refinancing your business loan

If you decide to go ahead and refinance your business loan, here’s your five-step plan to guide you through the process.  

1. Look at what you owe

Firstly, compile a list of your business debts, including the amount owed, the annual percentage rate (APR), your monthly payments, the remaining term of the loan(s) and any fees you will have to pay to get out of your loan(s) early.

Not only will this information come in handy when you come to compare your options, it will help you to determine whether refinancing is definitely the most cost-effective option for you. 

2. Gather together the right paperwork

To improve your chances of getting accepted for a new loan, before you make your application it’s advisable to have the following documents to hand to help speed up the process:

• twelve months’ worth of bank statements (if possible)
• business financial statements comprising of a balance sheet and detailed profit and loss statement (two years if possible) 
• business VAT returns (five quarters if possible) 
• list of existing business debts mentioned above 

3. Compare your options

Next, take the time to compare your loan options via Swoop. Make sure you compare interest rates available, as well as the term of the loan and whether there are any application fees. This should help you to weigh up which option suits your needs best.

4. Submit your application

Once you’ve made your decision, you’re ready to make your application. The documents you’ve gathered together in step 2 will help you with this.  

You’ll also need to provide proof of ID such as a passport or driving licence, proof of address such a utility bill or bank statement, and your company registration number (CRN) if it’s a limited company, plus the registered address and details of company directors. 

5. Repay your original loan(s)

If you’re approved for your loan, you can use the funds received to repay your original loan(s) and you’ll then make monthly payments to your new lender. If you’ve consolidated more than one loan, you’ll only need to make payments to one lender each month rather than several.

When should I not refinance my business loan?

Deciding not to refinance a business loan requires careful consideration of various factors to make sure it fits your financial goals and needs. Firstly, if your current loan terms are favourable and refinancing would not result in any savings or benefits, it may not be worth to pursue. Review the interest rate, repayment terms, and overall cost of the existing loan to decide whether refinancing would offer any advantages.

If you think about selling or restructuring your business in the near future, refinancing may not be a good idea. The costs related to refinancing, such as origination fees and closing costs, could outweigh any potential benefits if you plan to exit the business or change its structure soon. Additionally, if your business’s financial health has declined since you got the current loan, you may meet challenges in qualifying for refinancing or securing favourable terms. Lenders typically look at factors such as creditworthiness, cash flow, and profitability when evaluating loan applications.

Also, if you have concerns about potential changes in interest rates or market conditions, it may be better to delay refinancing until the timing is more favourable. Monitoring economic indicators and interest rate trends can help you make an informed decision about when to refinance your business loan.

The team of experts at Swoop will be happy to explain the best way for you to go about refinancing and to support you throughout the process. Get in touch today by registering an account for free.