Refinancing a Small Business Loan — All You Need To Know

What do you do when your business has bills to pay, but no cash in your bank account to cover them? If you’re not familiar enough with your business’ cash flow, this might be a difficult question to answer. You can see if you generate enough revenue by the time your bills are due, but that’s not always the case. So what should you do?

Needless to say, when running a small business, it’s important to have a good understanding of your cash flow cycle, because it will provide you with insight into what you can do as a small business owner to avoid situations where you’re unable to pay your bills or employees, on time. If you’re struggling with cash flow issues resulting from existing high-interest debt, like a Merchant Cash Advance, the best solution is to refinance that debt at a more affordable rate with a small business loan from Lending Loop.

What is refinancing?

In simple terms, refinancing is when you take out a new loan to pay off your existing, often more costly, debt. Many business owners use refinancing for several reasons. These include:

  • Extending their loan term
  • Allowing for additional borrowing
  • Accessing a more affordable  rate
  • Improving cash flow

When to consider refinancing

Now that you have a good understanding of what refinancing a small business loan entails and how you can use it to the benefit of your small business, it’s time to evaluate your current financial situation to determine if refinancing a small business loan is a good option for your business.

Here is a list of common scenarios in which most small businesses take steps to refinance their loans:

Took out a quick and expensive loan

A lot of small businesses are looking for access to quick cash so they apply for short-term business loans. This type of financing usually has a high annual percentage rate (APR) and is given to businesses in the form of a Merchant Cash Advance. It can sometimes cost business owners as much as a few thousand dollars a day to pay off, so if you have taken out this type of financing, it’s best to refinance that high-interest debt with a more affordable, long-term loan. Doing so could save your small business thousands in fees, which can be better allocated amongst your business’s operations.  

Improvement of your credentials

The underwriting process is different from lender to lender, but almost all lenders weigh the following criteria with the most importance: your personal credit score, your business’s annual revenue, and how many years your business has been operating. Be sure to keep an eye on these three important stats. This way, if anything changes with them (for example, your credit score improves to be over 700), you may then be eligible to refinance your pre-existing debt with a more affordable loan. The improvement of your qualifications can enable you to have access to even better, more affordable small business financing options moving forward.

Consolidated a number of debts

Another sign you should refinance your outstanding debt is if it is negatively impacting your business’s daily operations. If you find yourself strapped for cash – divvying the majority of your revenue to lenders every day, week, or month – you should consider applying for a single small business loan to pay those off. Doing so will consolidate the high-interest debt into a single, more affordable, small business loan.

How to refinance a small business loan

Now that we have defined what refinancing a small business loan is, and when to consider it, let’s take a look at how you can go about refinancing your small business loan:

1 – Determine your refinancing goal

Before diving into it, take a step back and ask yourself why you want to refinance your business loan. Do you want to reduce the total cost of your loan? Do you want to reduce your monthly payments? Or do you want your payments to be better scheduled? Establish some goals before getting started on the process.

2 – Dig into your existing debts

Look into all your sources of debt and compile the following information for each source of debt:

  • The amount you currently owe
  • Scheduled payment and its frequency
  • Annual Percentage Rate
  • Remaining repayment term

All of this information is important in deciding whether or not refinancing is right for you. Not sure how much you’re paying? Use our free tool to calculate what your outstanding loan is costing you.

3 – Look at your overall business finances

Take a look at your annual revenue, as well as your personal and business credit scores. Then start gathering documentation that a lender will require to verify these numbers. Some of these documents include profit & loss statement, bank statements, business tax returns. This will speed up the refinancing process if you decide to go with it.

4 – Consider different small business loan providers

Now that you have all your information ready, it’s time to start looking into your refinancing options. This step will all depend on your business – what kind of debt you have, how qualified your business is, and what your goals are for refinancing your debts. You also need to double-check with the lender that they allow refinancing with their loans and what their minimum requirements are to work with them.

5 – Apply for a small business loan

After having established goals, compiled all your paperwork and looked into your options, start applying! If you require any assistance, you can always email a small business advisor, who will help you through the application process.

6 – Choose the right lender

Once you hear back from the lenders you applied for, look at the terms they offer based on your application. You may notice that more than one of your refinancing options are worth it. This is where you look at the concrete terms they offer and form a decision regarding which one you will ultimately get a loan from and refinance your existing debt with. It’s best to choose the lender that is able to offer you terms that best fit the goals you established for refinancing in the beginning.

Does refinancing credit card debt improve credit score? How?

If your business relies on self-financing, you may be limiting its growth and profit potential. Many business owners fall into the trap, high-interest rate credit cards aren’t the answer for long-term financial needs, as businesses often accumulate high-levels of credit card debt that negatively impact their operations, and lower their credit score substantially. 

Let’s say your business is carrying considerable credit card debt, refinancing that credit card debt, with a loan from Lending Loop, may be an effective way to both save money and improve your credit score.  When you refinance existing high-interest, credit card debt with a Lending Loop loan.

Leaving the credit account open, after repayment has been made, is beneficial as it allows you to maintain a low Credit Card Utilization ratio, a metric used by credit rating agencies to determine a credit score. Similarly, relying on credit cards to finance your company and maintaining a high credit card utilization percentage can have an adverse effect on your credit score, raising your cost of borrowing over time, and decreasing profit as a result. If you or your business have relied on self-financing, then a business loan may provide a strategic growth opportunity for larger expenses required by your business. Using a loan has the potential to improve the credit score of your business while allowing you to take on a new project, or increase profits by expanding operations.

Ultimately, refinancing your small business loan will help get you out of a debt trap. It’s a helpful option to decrease costs and improve your repayment schedule. If you are thinking of refinancing your existing debt (like a Merchant Cash Advance), it’s best to speak to a small business advisor and get a quote to see how much you will save by refinancing your existing debt with a loan for your small business.