Loan Renewal: How Does It Work?
When you need to handle financial hurdles within your business, a business loan could help you keep your head above water. You could borrow money to tackle an immediate issue and pay back the lender over time. But if you need more money before your balance hits zero, a loan renewal could provide a solution.
A loan renewal would allow you to borrow additional funds and roll your existing debt into a new lump sum of financing, said Sara Beekman, senior account executive of renewals for SnapCap ( LendingTree is the parent company of SnapCap), which connects business owners with financing options from various business lenders.
Not only would a renewal give you access to more money, but you may have an opportunity to lower your interest rate or extend your repayment terms. Continue reading to find out how a loan renewal could benefit your small business.
- What is a loan renewal?
- Renewal vs. refinance
- How to renew your business loan
- Benefits of renewing a business loan
- Make sure the renewal process goes smoothly
What is a loan renewal?
Borrowers are eligible to renew their business loan when they reach the halfway point of their repayment term, Beekman said. Borrowers would need to take out an additional loan, which must be at least double their current balance, to pay off their existing debt and cover new expenses.
For instance, say you took out a $50,000 loan with a 12-month term to purchase inventory. If you need more money to make another large purchase but can’t wait until the end of the term, you could renew your loan when the balance is down to $25,000.
You would need to borrow at least another $50,000 – double the remaining balance – but you would have 12 months to pay off the new $25,000 balance instead of six months, which is how long you would have had to repay what was left of the previous loan.
When applying for your first business loan, the likelihood of approval would depend on your personal financial history if your business does not yet have a substantial track record. Your credit profile, current debts, personal assets and overall financial situation could impact the amount you can borrow and how much it will cost.
As you gain experience as a business owner and the company becomes more established, you could alter aspects of your loan. If the business has done well since you took out your first loan, you could receive a lower interest rate after renewing, Beekman said.
However, it’s more likely that your rate would stay the same, she said. Even if you’ve made all of your loan payments on time so far, several factors could contribute to your rate remaining the same, such as a drop in your credit score, she said.
“There’s usually a reason why that’s the case if it doesn’t go down,” Beekman said.
Renewal vs. refinance
Refinancing a business loan is similar to renewing, as it would allow you to obtain new funding to pay off existing debt. A key difference between renewing and refinancing is that refinancing requires you to replace your existing loan agreement with a new one, meaning a new repayment term and interest rate. On the other hand, a loan renewal would typically uphold the details of your original loan agreement, including the rate and term.
Another distinction is the amount of money you’d need to take out. When refinancing through SnapCap, for example, borrowers need to take out at least $5,000, Beekman said. When renewing a loan, borrowers are more likely to request another large lump sum of money to not only cover their existing balance, but pay for additional business expenses as well, she said.
Refinancing can be a better option for business owners who are struggling to make payments on their current loan, Beekman said. They could borrow the minimum required amount to get out from under debt they can’t handle.
Refinancing would also waive the remaining interest on your original loan, whereas renewing would not. You would have to use your loan renewal to pay off your prior balance, plus interest.
How to renew your business loan
Borrowers typically renew their loan through the same lender they worked with the first time around, Beekman said. You may be able to renew your loan elsewhere if another lender presents a better offer, such as a lower interest rate.
When you borrow through SnapCap, you’re initially assigned a representative who collects your information to find a loan for which you’d qualify, Beekman said. As you approach the halfway point in your loan term, another representative would reach out to ask about your renewal plans. Some people plan to renew as soon as they receive their first loan, Beekman said, while others consider the option later.
Each lender typically has its own renewal eligibility criteria, and some lenders may require you to repay up to 70% of your loan before you can qualify. You may need to contact your lender to indicate you’re interested in a loan renewal.
If you want to renew your loan and borrow additional funding, you would submit a renewal application with your original lender using the same business information as before, which should still be on file, Beekman said. You may need to submit your last three months of bank statements, but, other than that, you shouldn’t need to provide any new information, she said.
Before accepting a loan renewal with your original lender, you may want to shop around to see if you could be approved for a lower rate or longer terms elsewhere. If you’re working with a business loan broker, they could complete this research on your behalf, Beekman said.
You don’t have to renew your loan as soon as you hit the midway mark of your term, Beekman said. You could wait until your loan is 80% paid off, for instance, and then take out additional funding through a renewal. That would give you more time to pay off the final 20% and you would net a larger portion of your new loan amount, she said.
Benefits of renewing a business loan
One of the main advantages of renewing a business loan is having access to funding before your current debt is paid off, Beekman said. You wouldn’t need to wait until the end of your term to take out additional funding for your business’s needs.
The application process should also be simpler than it was initially if you stay with the same lender, as they would have your information stored. You could have faster access to funding than you would if you applied for an entirely new loan.
Renewing your business loan could also help you grow your business. You would be able to depend on financing to expand your operations without depleting your incoming revenue.
Disadvantages of renewing a business loan
A disadvantage of renewing your loan would be the requirement to pay off your existing loan debt. You wouldn’t receive the full amount of your second round of funding, as a portion would go toward your old balance, Beekman said.
You wouldn’t be able to reduce the overall cost of your original loan through a renewal, which would be another downside. You would still be responsible for paying off the principal as well as the interest on your remaining debt.
Make sure the renewal process goes smoothly
Although you may want to renew your business loan, a lender would still need to agree to do so. Business owners struggling to pay their debt could be directed toward refinancing instead, Beekman said.
Choosing to renew your loan would already boost your loyalty as a borrower in the eyes of the lender. But making payments on time and maintaining your credit standing would put you in an even better position, Beekman said. You could also see an increase in your credit score if you manage your debt responsibly, she said.
Before renewing your loan, you should also make sure your business is in good standing with your state’s Secretary of State office, if you registered your business. Registered LLCs and corporations typically must submit an annual report to the Secretary of State to continue operating in that state. You would want to be in good standing when seeking a loan renewal, as a lender may check your status.
Understanding your cash flow would also be crucial to your renewal eligibility. A lender asks for your most recent bank statements to evaluate your sales patterns and cash flow. It could affect your eligibility if the information doesn’t put your business in a good light.
If the lender won’t renew your loan, then you may want to consider refinance options to access more capital. But if you’re in good standing and you’re comfortable with your new offer, a loan renewal would give you access to funding that could help you cover unexpected expenses or take steps toward growing your business.