A business loan has a big role to play in the growth of any business. It helps the business to expand and be able to generate higher revenue. The fewer interest rates, the better it is for the business. If you are struggling with higher interest rates or high payments periodically on your business loan, you may want to replace the loan with a debt carrying lesser interest rates. This is called refinancing. It is also used to consolidate several business loans into single monthly payment to avoid high balloon payments on commercial loans.
Refinancing a higher interest loan for your small business to a loan with lower interest rates and more favorable terms can substantially reduce your business debt. It can improve your cash flow, reduce risk, prepare for future growth etc. In the midst of the process, it is easy to lose focus and interest in continuing with the process.
Refinancing a loan seems to be the most logical steps to take while you are in a mess with your present debt. It can give you hard time and not give you your breathing space while in the process. But once it is done you will be happy and so will be your business. Going for refinancing can restructure your business and give you time and resources for the growth of the business. When a string of uncertainty is hanging over your head, you should definitely consider refinancing your business loan for the greater good of your business.
If not done cautiously and carefully, you can make things unnecessarily difficult for yourself. If you are considering to refinance your business loan, these are the points to consider before refinancing business loans.
- Will I benefit from refinancing?
Before refinancing your loan, this must be the first question that you should ask yourself. If you have a loan with an interest rate of less than 10%, that’s hard to beat. But you still must try. The key to this is you should know about the creditworthiness of the business. You should think whether you can qualify for a loan with more favorable terms now than you did the first time round.
- Do the fees make it worth refinancing?
Small business owners must know that it’s not easy and neither is it free to refinance the business loans. At times, the fee can be very costly. It may include an origination fee, application fee, lender fee, appraisal fee (if commercial property is involved), and a prepayment penalty that applies if you refinance again before the loan is paid off.
- Working capital
In case you refinance your loans with the ones with monthly installments of lesser amounts, it can leave you with more working capital. This helps you dedicate extra cash to day to day operations, which can be allocated for the growth of the business.
- Your credit score
Now is the time when lenders have become aware of the credit score more than ever before. You should review your credit report and overcome any shortcomings there are. You should resolve all the negatives that could affect your loan terms including the amount and interest rate.
Refinancing is a good option but not every time. You have to look at the pros and cons of it and then you should decide about it. It can cost you too much so you must be careful.