Have you compared the market recently to get a feel for the interest rates your business could be offered if you took out a new business loan? It’s possible that your existing lender is charging excessive fees based on an outdated assessment of your business. By simply refinancing your business debt, you may be able to reduce your repayments and quickly save funds for your business. In this guide to business loan refinance, we run through the steps to refinance a business loan, the advantages and disadvantages to refinancing debt and explain the scenarios when it’s a good idea to do so, even with rising interest rates in 2023.
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What’s the Process to Refinance a Business Loan?
The process to refinance a business loan is actually pretty simple in the modern era, particularly with the rise of fast responding non-bank lenders, 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.
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. Ensure you provide all information requested by the lender or business loan marketplace to avoid unnecessary delays.
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.
What Costs are 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 the potential costs:
Early Exit Fees. Loan providers must allow you to repay your loan early but some lenders enforce an early repayment charge. This could be a fixed fee, or calculated as a small percentage of the remaining principal amount that was left on the loan at the point of exit.
Whilst there are no costs to apply, most lenders will charge an establishment fee, also known as an origination fee, when you agree to a new business loan. Usually 2.5 – 4% of the value of the loan.
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 what 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 debt arrangements and are interested in potentially saving money on them, you might be eligible to refinance a business loan.
In today’s world, it’s virtually impossible to run a small business without incurring some form of debt, whether it’s overdrafts, business loans or a business credit card used to cover various business expenses.
It’s certainly worth keeping an eye on the various business credit cards on the market as some credit card providers offer interest-free welcome periods and various other cost-saving promotions.
To qualify for business loan refinance, the eligibility criteria is much the same as any business loan. You’ll need to have been in business for a specified minimum period of time and be able to provide proof of your business income, such as bank statements, and in some instances, tax returns, financial statements and projected cash flow forecasts. In the case of refinancing a business loan, you may need to provide copies of your existing loan statements too.
Keep in mind, the exact eligibility criteria for business loans varies from one provider to the next and also depends on the type of financing you’re seeking.
It goes without saying that in general the best commercial loan refinance rates are offered to firms with a good credit history, proof of solid financials and complete tax returns.
Is it Still a Good Idea to Refinance a Business Loan in 2023?
At first glance, it may seem like it makes little sense to refinance a business loan in the current economic environment. As of July 2023, the RBA’s cash rate is at 4.1%. That’s 1% higher than at the start of the year and three times more than in July 2022. This directly impacts the rate at which banks can borrow, and it has a knock-on effect on the secondary debt markets that alternative lenders use to access capital. However, there are still scenarios where it might be a good idea to refinance a business loan. It could be that:
Your business circumstances have changed
If your business credit score has improved, you should almost certainly be able to access better interest rates.
The age of your business is also a crucial factor. If you took out a business loan while your business was in its infancy, you might be paying more than necessary. Businesses are more likely to default in their early years, so demonstrating a consistent income over a longer period can significantly improve the rate you achieve.
You have a new asset to secure a loan
A secured business loan presents less risk to the lender and generally allows borrowers to access better interest rates. If you’ve acquired an asset that can be used to secure a loan, it could be financially sensible to refinance an unsecured business loan.
You got a bad deal on your original loan
If you didn’t compare your options when applying for your original loans, there’s a chance you paid more than you needed to. Interest rates and fees can vary significantly from lender to lender, so it’s always worth comparing your existing rate with alternatives.
You’re refinancing high-interest products
If you’re refinancing high-interest products such as business overdrafts, business credit cards, or other high-interest facilities, a business loan may prove less costly, particularly if you have collateral to secure the loan.
Alternatives to Business Loan Refinance
If you already have an existing business loan and you’re looking to increase cash flow, there are several debt facilities that can operate alongside a business loan. These include:
A business overdraft provides instant access to cash when you need to cover ongoing business expenses. As a revolving credit facility, it’s common to operate one alongside a fixed-term business loan.
Business Credit Cards
Business credit cards are not only a great way to manage staff expenses, but they are also increasingly being used for B2B transactions. More suppliers are now accepting credit cards, making them an excellent tool for improving your cash flow.
You might be surprised by some of the low-cost business credit cards now on the market, such as the Cape Business Card, one of Australia’s best business credit cards. Instead of an interest rate, businesses pay a small fixed fee per month, which varies depending on the number of cardholders. The card offers 0% interest for 30 days, with a 2% late payment fee. The credit limit can range from $5,000 to $500,000.
Invoice Finance allows businesses to borrow money based on their unpaid invoices. Instead of waiting 30, 60, 90, or however many days specified in their payment terms, businesses can advance money from their invoice finance provider as soon as the invoice is issued.
The invoices act as security in the lending process, making it an organic way of advancing cash that was already due to the business. For this reason, lenders are often comfortable with companies running an invoice finance facility alongside a business loan.
Merchant Cash Advance
A Merchant Cash Advance (MCA) is a type of financing option for businesses where a lump sum of cash is provided upfront in exchange for a percentage of future credit or debit card sales. It’s suitable for businesses with high credit card sales volume, such as retail outlets. As repayments are directly tied to the business’s card sales volumes, it’s beneficial for businesses with fluctuating revenues.
An MCA provides quick access to capital and is another business loan alternative that commonly operates alongside other debt facilities.
Final Word on Refinancing Business Loans
Remember, you don’t always need to be consolidating multiple business loans and credit cards to be eligible to refinance business debt. You might simply be looking to refinance a single business loan with a new small business loan. This may seem particularly relevant if cash is currently tight and you’re evaluating all of your costs to identify potential savings. However, being proactive about your costs, even during prosperous times, can strengthen your business and prepare it for any potential difficulties down the line. Business loan refinance may not necessarily be your best bet in the current economic environment but there are still certain situations where it’s worth exploring.
It can be difficult to understand the exact business loan refinance rates you will achieve, but inform the new lender what you are looking to do and the existing loan rates you are on. Try to get an indicative quote based on a pre-approval, prior to making a formal application which will impact your credit score.