Let’s say that you run a business or own one. You might have a business loan that you took out to get your company off the ground. A bank or a credit union probably gave it to you.
A time might come when you want to refinance that loan. You have probably heard this term before, but do you know what it means and what it involves?
If you’re not clear on any details, we’ll break it down for you in the following article. We’ll also cover when you should do it and when you shouldn’t.
What Exactly is Business Loan Refinancing?
First, you need to understand what precisely loan refinancing is. When you refinance a loan, what that means is that you’re taking out a new loan to pay off the old one, or sometimes more than one if you have several outstanding.
If you’re refinancing a business loan, there are subtle differences between doing so and refinancing a personal loan, such as one you took out to buy a home or something along those lines. The real difference is that when you take out a business loan, how soon you can pay it back depends on how the business does.
When Should You Refinance a Business Loan?
There is no precise business loan refinancing formula. You might decide on a time to do it, but someone else in your position might elect not to.
Generally, borrowers refinance if they want to get a lower interest rate. That’s true for business loans, just as it is for personal ones. You’re trying to reduce your repayment amount.
Because of this, most business owners or operators will consider refinancing if they see that there’s a better deal out there for them. How the economy is doing often plays a part in this.
When Should You Not Refinance a Business Loan?
If you don’t see a better rate for you out there, that’s this formula’s inversion. At that point, you won’t want to make any changes. You’ll keep the loan you currently have and keep paying it to the best of your abilities.
If you have a debt and you’re struggling to pay off the loan, you can refinance. What you should remember, though, is that you might have lower payments from this point forward, but you’ll have a longer time till you pay off the entire sum.
Still, if that’s the only way you can keep your business afloat, you might opt for this solution. During the pandemic, some companies feel like that’s the only viable option for them.
If you decide to refinance, and the new deal means paying less money over a longer time, it will take longer for your company and yourself to get out from under that debt. You’ll have to keep that in mind if you have expansion plans or other long-range goals.
Cash Flow Problems
Cash flow problems are one other reason why a business owner might look hard at loan refinancing. Maybe you can’t pay your workers consistently, or perhaps you can’t afford all of the raw materials that you need to keep your factory running.
If you’re in dire straits, you may need to refinance because it will free up the day-to-day operational money you need. This is how you manage your debt-to-income ratio. If you can’t make the numbers work for you, then you might have to close your business and declare bankruptcy if you won’t refinance.
A Healthy Loan Repayment History
We don’t want to imply, though, that financial problems are the only reasons you would refinance a loan. You might do so if your business is doing well and you’re sending out your monthly loan payments with no problems.
In that scenario, you might see a better rate, and you feel like you can expand faster and more aggressively if you jump on it. Your lender will have no problems with you making the change because they know you have a successful business model. Your payment history reflects that.
If you do see a loan restructuring opportunity, you should talk to your business partners about it, assuming you have some. You’ll want to get your CEO on board and also your CFO or any other company heads that make the biggest decisions regarding your business’s direction.
Loan refinancing can save your business if you do it right, or it can help you achieve success levels you might never otherwise reach.
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