What You Should Know Before Refinancing Your Business Loan
When you first started your business you may have had limited debt options because of your lack of experience or credit history. As a result, you might be stuck with loans that are expensive or have too many payments each month. If you find yourself in a similar situation, refinancing your loans could help you.
What Is Refinancing?
Refinancing is when you take out a new loan to pay off other debt. We usually see business owners refinancing their loans to:
- Decrease the amount they pay each month
- Get a better rate
- Extend the term on their loan
- Allow for additional borrowing
- Make their payments more convenient
- Improve their cash flow
What to Consider Before Refinancing
Set Your Goals
Before you start researching your new loan options, it’s important to establish what your goals are. For example, if you took a Merchant Cash Advance then your daily payments may be taking a toll on your cash flow. As a result, your refinancing goal might be to free up your cash flow by getting a loan with extended payment terms. By setting an objective for yourself you'll be able to find a refinancing product that'll suit your needs.
Review Your Existing Debt
Next, you should make a list of the existing debt you have. With each loan you want to refinance you should identify its:
- Current balance
- Interest rate
- Remaining repayment term
- Repayment frequency
- Prepayment penalties
Gathering this information will allow you to know which debt you want to prioritize refinancing. The most common forms of debt that are refinanced are Merchant Cash Advances and credit cards, which tend to be the most expensive forms of debt.
Assess Your Financials
After reviewing your existing debt, you should find out how much you’ll need to refinance. You should also review your financial position to know what loans you’ll meet the requirements for. Some documents that will help you understand this are your:
- Income statements
- Balance sheets
- Bank statements
- Cash flow statements
- Personal and business credit score
Know The Cost
Always look at the total cost of refinancing to see if it will be worth it. Before getting out of an existing loan you should know all the details of the contract. This can be especially critical when trying to get out of a bad loan with a prepayment penalty. Lenders have prepayment penalties because they're losing out on the interest they expected to get throughout the duration of your loan. If the penalty outweighs the savings, you should consider the other benefits before making a decision.
Tips For Refinancing Your Business Loan(s)
Avoid Future Penalties
Moving forward, we advise that you get a business loan without a prepayment penalty. As your business grows, you'll have the freedom and flexibility to pay off your loan early without worrying about the negative impact on your cash flow.
Get A Payout Letter Early
A payout letter is a document you can get from your existing lenders stating that you intend on paying off your debt with them. Before you get a new loan to refinance other debt, your new lender will require a payout letter from you.
It's important that you ask your current lenders for a payout letter ahead of time to make sure you have all the documents you'll need. To get this letter you need to tell your existing lender that you intend on paying off your debt with them and need a payout letter by a specified date.
If you find yourself in a debt trap, refinancing can be a helpful option for you to decrease your costs and improve your payment schedule. If you are looking to refinance existing debt (especially a merchant advance, credit card, or other alternative lender) we encourage you to contact our Small Business Funding Specialists to get a quote and see how much you can save by refinancing.
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About the Author
Lendified is Canada's premier online lender for small businesses. The company was founded by former bank executives dedicated to provide businesses with fast, easy, and affordable financing. The Lendified team regularly produces blogs and guides to help small business owners succeed.