Signs It’s Time to Think About Refinancing a Business Loan
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Refinancing a business loan can save your company a lot of money … if the timing is right. Most business owners would agree that restructuring debt and taking advantage of lower interest rates sound attractive. The trick is knowing when to pull the trigger on your refinance. Here are a few things to look for, which could signal that it’s a good time to refinance your business loan.
Your Credit Scores Have Improved
In the early days of starting a business, it is difficult to establish business credit and, as a result, your business credit score might not have been at its best when you first secured your small business loan. Over time, as your business matures and you’ve had more experience paying off debts and working with vendors and suppliers, your credit scores typically improve. If your credit scores have improved meaningfully since you got your business loan, you might be able to refinance for better terms. Of course, if your business has run into some financial issues along the way, it is possible that your credit score has gone down, in which case, you might want to wait until you can build it back up before refinancing.
The Interest Rates Are Lower
While many people jump to refinance as interest rates are lowered, it might not always be a good decision to do so. Be sure the rate is at least a full point lower than that of your current loan before considering refinancing a business loan. Otherwise, fees will negate your savings.
You Plan to Keep Your Business Long-term
Again, the fees associated with refinancing might not be worth it if you don’t plan to keep your business long enough to recover the cost.
You Have Equity in Your Business
Possessing equity in your business can put you in a place to receive a more favorable loan rate when refinancing. But be aware if your loan is amortized. Even if you have had the loan for a while, your early payments were likely put mostly towards interest. That means you have not paid much towards the principal, which means you don’t have much equity. In this case, refinancing is probably not the best option, since you’ve already paid down so much interest.
You Don’t Mind Paperwork
As you likely remember from the first time around, taking out a loan requires a lot of paperwork and digging up financial documents from years past, not to mention the back and forth with the bank regarding these documents. You will have to do this again when you refinance. You’ll also need to update your business plan. For some, the savings are not worth the hassle and time investment.
You’ve Read the Fine Print and You Know What You’re Getting Into
Improved terms and lower interest rates obviously sound good to any business owner, but be sure you read the fine print, because there could be hidden restrictions or penalties on a new loan. For example, there could be a prepayment penalty or a limit on capital expenditures. There might even be a clause stopping you from getting a loan from another lender in the future.
Successful entrepreneurs know that you simply cannot have too much information about your business, especially when it comes to financial matters. If you take the time to examine your current loan and the options available to you, you can be confident that you’ve made the best business decision for the company.