Credit · July 17, 2020

Refinancing a Business Loan Can Save You Money and Grow Your Business

Refinancing a business loan can provide many strategic advantages. Maybe you can get a more favorable interest rate. Or perhaps the market for your product or services has grown, and a refinance could help you scale your operation.

Before you hit the market, it's key to decide what you hope to accomplish by refinancing. If you have a clear sense of your long- and short-term financial goals, you'll be able to better evaluate whether each refinancing deal you consider is the right one.


Advantages of refinancing a business loan

Borrowers commonly refinance for lower interest rates. Lowering the annual percentage rate, or APR, for your loan typically lowers existing payments. That freed up cash flow could go toward expenses for operations and growth. Or you could further consolidate your balance sheet as the extra cash pays down balances for higher-interest debt.

In addition to lowering debt payments and thereby increasing the availability of working capital, you can use refinancing as a strategic way to:

  • Reduce the overall cost of your loan. A better interest rate, even by a few percentage points, can lead to substantial savings over the life of a business loan.
  • Make payment terms and scheduling more convenient for your business.
  • Optimize the benefits of your business-banker relationship. You may obtain an increased capacity to organize accounts and balances to lower fees and earn more interest on deposits.

Reducing the amount of overall debt may improve your overall business credit score, boosting your eligibility for good financing terms in the future. The amount of debt relative to your total amount of available credit—simply, how much you currently owe divided by your credit limit—is referred to as your credit utilization ratio. This ratio accounts for up to 30% of your credit rating. Potential lenders (and possibly even investors) see a low credit utilization rate as an indication your business is managing debt wisely.

Getting prepared: Take a financial selfie

Make an honest self-assessment of your readiness to approach lenders. This process will go a long way toward finding the best lender for your refinancing needs. Your business's credit and financial profile may have undergone significant changes since your original loan. A longer, more solid business history and stronger business credit score can work in your favor, garnering you a better deal on rates and terms.

Lenders will want to know: Is revenue increasing? Has your credit score improved? Gather all the information you have about existing debt and liabilities. At a minimum, pull together:

  • Original loan purpose and related documentation
  • Current outstanding balances
  • Payment amounts and schedules
  • APR 
  • Prepayment penalties
  • Remaining loan term

Have you managed to make all of your existing loan payments in full and on time? If so, the case for refinancing may be a strong one. Consider refinancing especially if the original debt was a short-term loan. Refinancing with a longer-term loan may lower your monthly payments.

Find the best refinancing solution for your business

Use the information from the financial self-assessment to develop guidelines for how much you may want to refinance, as well as what loan length and terms to seek. Typically, the amount and lender you choose will largely be tied to several factors, including the purpose of the loan you want to refinance, debt outstanding at the time of application, current interest rates and the monthly payments you can afford. For instance, lenders may be hesitant to give their best terms when the existing debt is tied to an asset that's past its useful lifespan.

Essential loan components you should use to compare loan options include:

  • APR
  • Loan terms and covenants
  • Underwriting and origination fees
  • Closing costs

Refinancing is typically available for a range of common business loan types. These might include:

  • Working capital loans
  • Equipment loans
  • Term loans
  • Commercial real estate loans

Lenders should be transparent about their costs to refinance, including underwriting, origination and other fees, which may total 1% to 5% of the loan.

Understand the risks and hurdles

Estimate payments in various combinations of interest rates, loan terms and APR ahead of an application with online tools. Carefully weigh the potential impact of any prepayment penalties for loans you plan to pay off through refinancing. Find out whether a potential lender requires collateral or a personal guarantee for a refinance loan. Be mindful when lenders do a "hard pull" on your credit history—that is, a full check performed by a lender before extending credit. Too many hard-pull inquiries in a short period can lower your score.

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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.