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.
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.
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.
- 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.
- 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
- 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.
- 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.
- 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.
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.