Did you know you can achieve big wins with your financial success if you were to consider refinancing a business loan? Nobody likes to be in debt—especially debt that they can’t pay back. But for better or worse, being in debt is usually just part of being in business. According to the U.S. Chamber of Commerce, only 2% (possibly up to 6%) of small businesses are bankrolled by family and friends…and that can still result in debt—perhaps debt that gets grumbled about at holiday gatherings.
Around 16% of businesses avoid this family entanglement and seek initial funding from banks. Almost 90% of those loans are issued by big banks. But, around 64% of entrepreneurs use their own piggy banks to get a business started, instead of securing a loan for initial expenses.
Every Business Eventually Needs (More) Money
But no matter how you dice and slice these stats, it’s clear that at some point, businesses will need more money to grow, or even to stay afloat. Around 33% of businesses actually fail due to a lack of capital. Or at least experience financial challenges. That’s probably why the Small Business Association distributes more than 14 million loans annually. Sometimes surpassing $764 billion in total funding.
And at a certain point, debt service—paying off debt, in consumer parlance—may become onerous or prohibit expansion. Like a mortgage, car loan, personal loan, or consumer credit card debt that’s become too much to handle, business loans can also create a dire financial situation. Impeding cash flow as a business owner throws everything they can at their balances and punitive interest rates.
What Does it Mean to Refinance?
The solution to this problem is not fleeing to some obscure exotic destination where the thread of extradition is low. Rather, you can refinance your business loans. As you likely know, this means a third party would pay off the original loan. You will then owe payments to the party holding the refinance loan.
But just like refinancing your mortgage results in a lower monthly mortgage payment, refinancing a business loan (or any loan, really) will save money—not only through a lower interest rate but also by redistributing the loan balance over a renewed loan term.
Can You Get an SBA Refinance?
That depends on the initial loan—was it an SBA loan or a small business loan from a private lender like a bank? Remember that the SBA does not directly issue loans to consumers. But it does so through financial institutions like your local bank.
If your business involves expensive equipment or some aspect of commercial real estate, there is the SBA 504 Refinance Loan. This can provide you with between $50,000 to $5.5 million for 10, 20, and 25-year terms. The interest rates are below the market rates and approval takes about the same amount of time as a home loan.
The SBA 504 also offers some additional flexibility in that you can get cash for up to 20% of the property value to cover operating expenses. Killing two birds with one stone: refinancing a business loan and getting some working capital—all for the same monthly payment.
But here’s the thing, the SBA 504 Refinance Loan is for owner-occupied commercial real estate or equipment. The debt you’re refinancing must be older than 6 months and you must have been in business for at least 2 years. But wait…there’s more. You cannot use the SBA 504 to refinance another SBA loan.
This means that a landlord who isn’t living or operating a business on their property can’t take advantage of these below-market rates with a cash-out component. And if you’re a business owner renting your retail pad, it’s probably not for you either. And certainly, if your initial loan was an SBA 504 (or an SBA 504 Refi) you cannot refinance it again with the SBA.
Can you Refinance an SBA 7(a) or Use an SBA 7(a) to Refinance?
Additionally, the SBA typically does not like to allow borrowers to refinance their SBA 7(a) Loan. Which is the most common form of business funding from the Small Business Administration. SBA 7(a) Loans are typically used for working capital and purchasing light equipment (such as office furniture). Although, you can use them for purchasing real estate.
You may be able to use an SBA 7(a) to refinance debt—but it’s unlikely that you can refinance an existing SBA 7(a) with another SBA 7(a) loan. If your original debt was not issued by the SBA (as mentioned) they will still be reluctant to refinance it, unless you meet some of the criteria that we’ll outline in the following paragraph.
Can you show that:
- your existing debt is structured as a line of credit or credit card with terms that have become onerous and/or unattainable, or the value of your collateral now exceeds the loan balance?
- the interest rate on your current loan is above the cap rate for SBA loans, or that the current lender is unwilling to refinance the loan?
- the current loan is no longer relevant—especially if a balloon payment is still outstanding—or if your business saw a change in ownership since the loan’s origination?
If you answered yes to any of these questions, you might be able to convince the SBA to refinance your existing debt. And if your original loan was also an SBA loan, you might be able to twist their arm into some “in-house” refinancing.
Do you need access to more capital, but your current lender said no? Does your original lender refuse to update the loan terms in alignment with current SBA terms? You might be able to get an SBA refi for an SBA loan. Remember to speak to your lender first.
Is an SBA Refi Worth It?
There are a few other requirements for refinancing with the SBA:
- You must have been on time with your payments for the past 12 months.
- You’ll need to show that you can repay your loan with strong cash flow statements.
- And you need to be in good standing with the SBA—so that means no judgment or tax liens.
If you don’t meet these requirements for whatever reason (for example, your cash flow has been poor lately, or you’ve missed one payment) you’ll have a harder time getting an SBA refi.
As you can see, there is a lot of red tape to deal with when it comes to an SBA loan. Especially when it comes to refinancing an existing SBA loan. Or even using an SBA loan to refinance other forms of debt (SBA-issued debt or debt from a private lender).
The reasons behind this are open to conjecture and perhaps some delving into economic theory. But for the purposes of this article, you can—in select circumstances—refinance with the help of the SBA…it just might involve a lot of headaches.
Is Debt Consolidation a Form of Refinancing?
A consolidation loan is one large loan that borrowers can use to pay off several other smaller loans. As a business owner, you may have several outstanding loans on property, equipment, and perhaps even inventory.
Managing all these different debts can become a headache, even if you have them on autopilot. If you have a bad month, you might have to sit down with all your bills and decide which creditor you need to call to discuss postponing a payment.
Life is easier when you don’t have multiple creditors. Also, a diversity of interest rates can end up costing you more money. Rates can fluctuate with market changes. Additionally, of course, you can get a better interest rate as your borrowing history develops over time. This means that some of your loans—just by virtue of when you took them out—may have worse interest rates than others.
Some of your loans may also have variable rates, in contrast to your fixed-rate loans. This means that all of a sudden, certain loans may become more burdensome to service. This is especially true in market climates like the current one we are in now, with rampant inflation which the Federal Reserve attempts to fix by raising their interest rates.
Consolidation loans can eliminate these headaches by bringing everything onto one balance. You may not get a consolidation loan with a lower interest rate than all of your outstanding balances. But in that case, you can just leave the lower interest rate loan out of the reconsolidation.
It’s important to sit down with a calculator and figure out your potential monthly payments. In any case, chances are also high that the rate on your new loan will be lower than that on most of your outstanding loans—which likely means lower monthly payments.
What About Balance Transfers?
One out-of-the-box method for a business loan refinance is to use something called a balance transfer. A balance transfer involves one credit card company (of yours) paying off one or more of your credit cards. Incidentally, per our earlier conversation about whether or not you can refinance an SBA loan, this might be one way to do so.
In any case, it can certainly pay off any outstanding balance associated with a loan number. That includes vehicles and mortgage loans as well. Whatever the loan may be, you should check to make sure there is no prepayment penalty before using a balance transfer to pay it off.
In some cases, such as a loan where the underlying asset lists the lender on the title, you should not have the balance transfer pay off the entirety of the loan. This is because the title will pass to the new creditor doing the consolidation. Which could involve some paperwork headaches.
For example, if you are using a balance transfer to pay off a loan for a work vehicle, leave a few dollars on the balance so you can pay it off yourself and retain the title without any further issues.
How Do Balance Transfers Work?
Rates and terms for balance transfers are often very favorable. A 0% interest rate for 12, 18, or even 24 months is common. This is why consumers often use balance transfers to consolidate credit card debt.
But credit lines on business credit cards can be larger. For example, Experian data suggests that while the average consumer credit limit—in total among all their cards—is $22,751, the average credit limit of a single business card is more than twice that at $56,100.
While that’s not going to do anything for someone who needs business refinance loans beyond seven figures, you’d be surprised at how credit cards can work in place of small business refinance loans to reconfigure debt and lower monthly payments. Balance transfers do have a transfer fee, which is usually 2% or 3%. However, that’s no different than the origination fee of a more traditional loan.
You can use a single balance transfer to consolidate several other loans of diverse types. Moreover, some banks will allow you to combine credit lines from several of the cards they service. This option is not available to all types of customers, but customers with a good credit score and a good working relationship with a financial institution may find the flexibility they need in their credit department.
When the promotional period of the balance transfer ends, the balance will begin to accrue interest. Some creditors do chargeback interest if borrowers do not pay off the balance by this time. Meaning, they will demand all the interest that would have been applied if not for the promotional rate. All in one lump sum, at that.
But either way, if a significant portion of the balance is paid down, and you have other credit cards, you can call them up and see if any balance transfer promotions are available there. In fact, it’s more than possible to move the balance around from institution to institution, taking advantage of the 0% interest rate again and again until it’s paid off.
Two Birds with One Stone: The Cash Out Refinance
If your business has some assets like real estate (and perhaps some forms of equipment) you can explore a cash-out refinance or a cash-out refi. A cash-out refi is different from just refinancing your mortgage. A cash-out refi involves borrowing more than what you owe. Often to pay off the existing mortgage and to pocket the difference as cash for operating expenses.
Consumers may use a cash-out refi to pay off the old mortgage and get some cash to renovate their property. Essentially killing two birds with one stone, instead of refinancing and getting a HELOC (home equity line of credit). But a business owner can use this cash for operating expenses. Which incidentally, may include renovations after all—whether you’re a commercial landlord or an investor doing fixes and flips.
Allowing a borrower to take up to 80% of the property’s value is fairly standard practice in the consumer world of cash-out refis, or 80% LTV (loan to value of the underlying property). But in the business world, borrowers may find lenders who are willing to do a 90% or even 100% LTV.
For example, let’s say you own a 10-unit apartment complex with $2 million, and you have about $1.5 million left on the mortgage. A 90% LTV would allow you to take out $1.8 million. Of that, $1.5 million would go to paying off the existing mortgage, while the remaining $300,000 could be pocketed as cash.
This cash could then perhaps be used for installing new kitchens, paving a parking lot, replastering a pool, or a new roof. You could even just hold the cash in reserve and use it to make monthly payments on the new mortgage. Or you could do some combination of everything.
Need Money Now? Introducing the Merchant Cash Advance
A unique option available to business owners is the merchant cash advance. This is much different than consumer cash advances in that they can usually only be offered to merchants who take debit and credit card payments. The loan is repaid by garnishing (essentially) the cash flow from customer and client payments.
Like any loan, the MCA (as it’s called) has its pros and cons. Interest rates can be rather high. But the funding is pretty much instantaneous, in contrast to some of the other loan options discussed. Which can take weeks or even months to bring to fruition.
The business cash advance also requires a fairly strong cash flow to secure. In fact, cash flow is one of the prime factors in determining whether or not an MCA can be issued to a particular business owner.
Consider Your Loan Options Vs Your Business Goals
So now that we’ve reviewed some of your refi options—SBA, consolidation loans, balance transfers, MCA, and cash-out refinance—let’s look at what you need to get started. The first thing you’ll want to do is consider your end goal in refinancing your debt. Is your goal to lower your monthly payments? Is it to save money in the long term? Or both?
To illustrate a little further, let’s say you have an outstanding debt of $500,000 of 6%. You have one lender who can give you a 4% rate, but only in a 5-year term. You have another lender who can give you a 5% interest rate, but with a 10-year term.
The first loan will result in monthly payments of $9,200 and $52,500 of lifetime interest. The second loan will result in a monthly payment of $5,300, but $136,000 in total interest payments.
Now you have a choice. Do you want a much lower monthly payment (lower by half that of your other potential option), but over time to forfeit three times the amount of interest? Or do you want to minimize your long-term interest payments while putting up with a higher monthly payment?
The answer to that question will depend on you and your business goals. If cash flow is currently in a slump, a lower monthly payment is more attractive. Lower monthly payments can also improve the look of your income.
But a shorter loan (despite its higher monthly payments) means accelerating faster toward a debt-free (or reduced debt) situation. Which will be more attractive to potential buyers of your business? So once again, it comes back to you, your cash flow, and your long-term goals.
If selling your business is in the cards (for the near future) getting rid of debt may be more important. But on the other hand, if growing your business is the word of the day, then increasing your cash flow is more important.
Paperwork After Your Goals
Once you’ve figured out your goals, it’s time to get the paperwork in order. A potential lender is going to need to see cash flow statements, operating expenses, a balance sheet—you name it. There are some forms of documentation they may not need to see.
For example, a lender providing some initial business funding may want to see a business plan. A lender providing a business loan refinance probably doesn’t care about that so much. What they want to see is that you have the means to pay your debt obligations. That said, they want to know how business is going. They want to know about your cash flow, current expenses, and operations.
A business lender providing a refi may want to discuss some collateral—particularly the cash-out refi. Or if you are looking to refinance your mortgage. Generally speaking, the performance of your business and any potential collateral is more important than your personal credit or even your business credit.
To be clear, good credit is still very important, but credit scores are typically more of a factor in consumer lending than business lending. This is especially true in real estate lending. Where the underlying asset (the collateral) is very much of interest to the lender.
The Final Step: Find a Lender For Your Business Loan Refinance
The final step in refinancing your business, after considering your goals and getting your ducks in a row, is finding a lender. These days, there are a number of financial institutions vying for your business—traditional brick-and-mortar banks, (possibly) the SBA, and even online banks.
They may be able to offer Merchant Cash Advance arrangements and even larger consolidation loans or refinancing options for larger debts. Before shopping around brokers and banks, contacting some of the companies you already do business with—that is, your payment processor—might be the best way to start refinancing some of your business loans.