Should I Refinance a Business Loan?
Have you compared the market recently to get a feel for the interest rates that your business would be offered if taking a business loan? It could be that your existing lender is charging excessive fees based on an outdated interpretation of your business. By simply looking to refinance the business debt you may be able to cut down on your repayments and make a quick saving of funds for your business. In this article we run through the steps to refinance a business loan and whether it’s a good idea.
What’s The Process To Refinance A Business Loan?
The process to refinance a business loan is actually pretty simple these days, particularly with the rise of fast responding non-bank lending companies, such as Prospa or Capify. To refinance a business loan you’ll just need to follow these simple steps:
- Weigh up if a refinance is the correct option for your business. How much interest are you paying on your current loan and how much can you save by switching? Are there any exit fees involved if you pay your existing loan early? If your loan is from a bank then this could be the case, if it’s from an online SME lender then there isn’t likely to be any early repayment fees.
- Review your options. Both banks and the best rated non-bank Australian lenders who specialise in providing SME loans. Find the best fit for your business.
- Apply for your new business loan. If you are unsure about which provider is the best fit for your business, consider applying through Lend.com. Their proprietary LendScore™ algorithm matches you to the most appropriate provider.
- Receive approval. Providing you submit the right information upfront, including bank statements and company financial statements if required, then this should keep the process quick
- Receive funds, settle your old loan obligations and begin your repayment schedule with your new loan provider.
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What Costs Could Be Involved In The Refinancing Process
In the best-case scenario, you should only really encounter an origination fee when you refinance a business loan. However, depending on your circumstances and who your existing lender is (particularly if this is a bank) you should be aware of all of the potential costs:
- Early Exit Fees. Loan providers must allow you to repay your loan early but some lenders, mainly banks, enforce an early repayment charge.
- Origination Fees. Whilst there are no costs to apply, most lenders will charge an establishment or origination fee when you agree to a new business loan. Usually 2.5 – 4%.
- Valuation Fees. If you are required to provide an asset as security for a loan then you may need to have that asset professionally valued. This is more common if your business is seeking equipment financing or finance for commercial property.
Remember, even with these fees your business loan refinance rates should be lower than that you currently have with your existing debt.
Advantages and Disadvantages If You Refinance A Business Loan
- Achieving a lower rate. Refinancing your business debt should help you get a better deal with lower interest rates.
- Increase your cash flow. If your repayments are smaller you can use your cash flow elsewhere.
- Consolidating debt. Whilst there’s a small process to receiving the new loan, consolidating multiple debt obligations into one can make it much easier to manage and free up time for more important activities.
- Ability to release securities. If any of your previous loan agreements were on a secured basis you may be able to pay the loan off with an unsecured small business loan.
- As previously discussed, depending on whether there are any fees or penalties involved in paying off your existing loan obligations it may not prove worth it when all costs are considered.
- If you’re consolidating a sizable amount, it may be that your business consolidation loan is a long-term loan, so whilst the interest rates are more favourable, the total amount of interest paid could be more if paid over a longer period of time.
- Whilst not necessarily a disadvantage if you’re saving money in the process, you are ultimately using debt to pay off another debt. If you have the cash to clear a loan early without the need to take another, then chances are that would prove the best option.
- If you’ve built a long-standing relationship with a lender, it may not be worth giving this up just for financial savings.
Is Your Business Eligible For Business Loan Refinance?
If you have existing loan arrangements and are open to see if you could save money on these then you could be eligible to refinance a business loan.
Nowadays it is virtually impossible to run a small business without incurring debt – whether that be overdrafts, business loans or a business credit card used to pay for all of your business expenses. Whether it’s for new stock, a renovation or simply day-to-day running costs. When looking to refinance the existing debt you have, you’ll need to be able to demonstrate that you can afford the current repayments and that the cash-flow deficiencies you had were in the past or that they’re just temporary and part of your working capital cycle. This will show your business can meet the consolidated debt repayment schedule.
It goes without saying that in general the best interest rates are offered to firms with a good credit history, proof of solid financials and complete tax returns. In the case of refinancing a business loan, you may need to provide copies of your existing loan statements too.
Final Word When Looking To Refinance A Business Loan
Remember, you don’t always need to be consolidating multiple loans and credit cards to be eligible to refinance business debt. You could simply be looking to refinance a single business loan with a new small business loan. It may seem particularly applicable if cash is currently tight and you’re needing to evaluate all of your costs and discover where you can make important savings. However, the more proactive you can be on your costs, even when times are running smoothly, it can only prove to build the strength of your business should you encounter any difficulties later down the line.
Whilst it can be difficult to understand your exact business loan refinance rates you can achieve, once you inform the new lender what you are looking to do and the existing loan rates you are on, they will understand you are looking to make a cost-saving.