When your business needs access to capital quickly, it's easy for the particulars of interest rates and loan terms to get lost in the hustle of trying to get the cash you need. But as the realities of regular payments and compounding interest set in, the loan that felt like a miracle when it was first approved may not look so great today.
Are you really going to be stuck with these expensive payments and this high-interest debt for the full term of your loan? In some cases, maybe not.
If you've had a significant improvement in your credit score, time in business, revenue, or other financial factor--you may qualify for a better business loan.
Even so, it's important to keep in mind that the ability to access better funding terms doesn't always mean that refinancing your business loan is a good idea.
Let's take a look at the six most common signs that you're ready to refinance your business loan--and that refinancing will be a smart move for your business.
1. If You've Significantly Improved Your Credit Score
For most lenders, your personal credit score remains one of the most significant factors impacting your ability to qualify for various business loan products or repayment terms. So if your personal credit score has made a major leap since you originally applied for your business loan, you may be able to refinance at a better rate.
To keep things simple, you can assume that any time the first digit of your credit score changes, it's probably worth checking to see whether you may be eligible for better forms of financing.
In particular, reaching a credit score of 700 or higher is a major milestone at which you may be able to refinance your business loan and gain significant savings on interest.
2. If You've Reached a Major Business Milestone
Beyond your personal credit score, certain changes within your business can also present milestones that open you up to new business loan opportunities. Reaching one of these milestones, in particular, may be a sign that you're ready to refinance your existing business loan for better interest rates and terms:
Two Years in Business
When your business is very young, it's harder for lenders to predict how you will manage cash flow and whether your business model can be viable over the long haul. As a result, businesses that are less than two years old are regularly downgraded by lenders in terms of loan eligibility.
Among many lenders, the two year anniversary of your business is a benchmark that significantly changes your loan eligibility. If you funded your first few years of business with a high-interest startup loan, reaching this milestone may present a good opportunity for refinancing.
Six Figures Annual Revenue
Reaching six figures of annual revenue, for many lenders, presents yet another milestone in your funding eligibility. If you've had a significant change in annual revenue since signing on for your original loan agreement, talk to your lender to see whether you may be eligible for refinancing.
3. If You're Shaking Off a Bankruptcy
Anyone who has experienced a business or personal bankruptcy knows all too well the damage this experience can do to your ability to access future business funding at an affordable cost. But if you've been in this position, you also know that the seven year mark after a bankruptcy is something of a magical number. This is the time when the bankruptcy will no longer appear on your credit report and negatively impact your access to capital.
If you've had to take on high-interest debt while recovering from a bankruptcy, that six year milestone presents a great opportunity to refinance your business loan. Without the weight of the bankruptcy on your credit report, you'll likely have access to a wider range of loan products at much better terms.
4. If You're Consolidating Multiple Business Loans
For business owners who aren't able to qualify for the full amount of funding they need within a single loan, it's not uncommon to take out multiple smaller loans in order to piece together necessary financing.
This solution meets the needs of the business in a pinch, but over the long term these multiple loans--which tend to be short-term loans with high-interest rates--can add up to an overwhelming expense and cash flow burden for the business.
If you're currently carrying multiple short-term loans for your business and have since improved your financial standing to be eligible for better forms of financing, debt consolidation is a great way to refinance your loans into a single, more manageable solution.
5. If the Terms of Your New Loan Outweigh Any Penalties
Although a change in your credit or financial situation may open you up to better loan products than you previously qualified for, this doesn't always mean that refinancing your existing debt will be the best financial choice. This is particularly true if your existing loan carries a hefty prepayment penalty.
Remember, choosing to refinance your business loan effectively just means that you're taking out a new business loan, then using the capital from that new loan to pay off the full balance of your previous loan as a single lump sum.
By the time you add up prepayment penalties and any other fees associated with refinancing, it may be that the savings on interest from the new loan aren't enough to actually save you any money.
6. If You Need to Extend Your Repayment Schedule
Saving money on interest isn't the only reason that business owners may seek to refinance their existing loans. If you have one or multiple short-term loans with daily or weekly payments, you may be seeking to refinance your business loan in order to get some relief from the cash flow crunch caused by those frequent payments.
In some cases, this can be a good reason to refinance--particularly if your credit score has improved enough to offer better rates and terms on your new loan. You may not necessarily save money, but the relief to your cash flow situation still makes this a win.
Problems can arise, however, when you start refinancing one high-interest short-term loan with another similar product as a way of extending your payment schedule. This can quickly start a vicious cycle of debt on top of more debt that in the long-term will cause more problems for your business than it solves.
The bottom line? A lower interest rate doesn't always translate to savings, and refinancing a business loan without improving your financial standing can quickly spiral into a dangerous cycle of never-ending debt. So before you refinance your business loan, do the math and weigh all the pros and cons to make sure that this move will actually have a positive impact on your business.