When Should You Refinance a Business Loan?

Good reasons to refinance

The strongest reasons are a clearly lower total cost, a better fit between payments and cash flow, or consolidating several debts into one manageable payment.

Refinancing replaces an existing loan with a new one, usually with different terms. It tends to pay off in these cases:

• Your credit or revenue improved. A stronger profile may earn a lower rate or cost than you got when you started.
• Rates or pricing fell. Market conditions may allow a cheaper deal.
• Payments strain cash flow. A better-matched schedule can reduce stress, even if total cost rises a little.
• You have several debts. One payment is easier to track than four.
• You want to change the structure. For example, moving from daily or weekly payments to monthly ones.

Each reason needs its own math. Do not assume one is better than the others.

Bad reasons to refinance

Skip a refinance if it only stretches the term to shrink the payment, if fees wipe out the savings, or if the business has a deeper cash problem that new debt will not solve.

Be careful if any of these apply:

• The monthly payment drops because the term doubles, and total interest and fees rise
• Prepayment penalties or origination fees cost more than the savings
• You are borrowing again mainly to pay off older debt because sales are falling
• You would lose valuable terms, such as no personal guarantee or a favorable rate

If the real issue is that revenue does not cover costs, refinancing delays the problem. Fix pricing, costs or sales first. Our article on cash flow problems covers common causes.

Run the break-even test

Add up everything you pay under the current loan from today, add everything you would pay under the new one including fees, and compare the totals. Refinance only if the new total is lower or the cash benefit is worth the difference.

An illustrative example. You owe $80,000 on a loan with 18 months remaining and payments of $5,300 a month. Remaining cost: $95,400. A new $80,000 loan over 36 months has payments of $2,900 and a $1,600 fee. Total cost: $104,400 plus $1,600, or $106,000.

The refinance costs $10,600 more but frees $2,400 a month. It only makes sense if that cash earns more than $10,600 over the period or prevents a crisis. If the freed cash sits idle, skip it.

Costs to count before you sign

Count origination fees, prepayment penalties on the old loan, closing or legal costs, and any change in collateral or guarantee requirements.

Ask both lenders for exact numbers:

1. Old loan. Is there a prepayment penalty, or a requirement to pay interest through the full term? Some products charge a fixed fee regardless of early payoff.
2. New loan. What are the origination fee, documentation fee and any other charges?
3. Security. Does the new lender want collateral or a personal guarantee the old one did not?
4. Timing. Will there be a gap between payoff and funding?

Use the payoff letter from your current funder, not an estimate. For background on structures, see business loan terms and business loan rates.

Refinancing different kinds of debt

Term loans, lines of credit, SBA loans and short-term advances each refinance differently. Match the new product to the purpose.

A few patterns worth knowing:

• Short-term, higher-cost advances. Moving into a longer-term loan can reduce the payment, if the total cost holds up.
• Lines of credit. Often refinanced when limits or renewal terms no longer fit. See refinancing a business line of credit.
• SBA loans. Some SBA programs allow refinancing of eligible business debt, with their own rules. Read SBA loans to refinance business debt and check current rules with the SBA.
• Equipment loans. Usually tied to the equipment, so options are narrower.

Where ROI Funder fits in a refinance decision

ROI Funder places term loans, lines of credit, working capital and SBA loans that can replace existing debt for qualifying businesses, and shows total cost before you sign.

If your business has 6+ months in operation, $20,000+ in monthly revenue and a 500+ FICO, you may qualify for a new structure that fits your cash flow. Term loans have fixed payments and fund in 1-5 days. SBA loans are slower but the lowest cost, which suits a business that can wait.

Our angle is payback math. We show the true cost, payback period and monthly-equivalent payment of the new deal so you can compare it with what you pay now. We cannot promise a refinance will save you money. If the numbers do not work, the right answer is to keep your current loan. Applying takes a few minutes, uses a soft credit pull and carries no obligation. Start here.