With the recent rate hike by the Fed Federal funds rateborrowers with small business loans may think they’re missing out on refinancing to lower interest rates.
This is not necessarily the case. Lower rates may still be within reach, as the rate you pay on a business loan isn’t just affected by the Fed. While better interest rates may help, that’s not the only reason to consider refinancing. As you weigh your options, keep the following points in mind.
The Benefits of Refinancing a Business Loan
ensure lower interest rates
Loan type, collateral, borrower eligibility and age in business all affect your business loan interest rateFor example, if you’ve been in business for years, built up a credit score, or now have collateral to get a loan, you may be eligible for a lower interest rate — something you didn’t have an option for before.
“If someone wants a lower rate, it’s usually best to get their business going,” said Luis Ramos, director of business consulting at the nonprofit lender Accion Opportunity Fund. This is especially true if your business is just getting started when you first get funding. “Usually when they get their first loan, their interest rate is usually a lot higher than the previous business [operation] For several years,” Ramos said.
Lock in a fixed rate
The Fed said further rate hikes are likely in the future. For borrowers who currently have a variable rate loan, refinancing to a fixed rate loan can provide stable monthly payments. However, keep in mind that fixed-rate loans typically carry a higher interest rate than the initial rate on variable-rate loans, and not all lenders or loan types will offer fixed-rate options.
Raising the federal funds rate could put your variable rate higher than you expected. When considering whether to refinance from a variable-rate loan, Ramos recommends considering how the higher interest rate and the larger monthly payments that come with it will affect your cash flow. If you can’t easily make larger monthly payments, locking in a fixed rate is an option worth exploring.
Reduce monthly repayments
your amount monthly repayment Can have a significant impact on your business operations. If you’re concerned about cash flow, refinancing your existing loan to reduce your monthly payments can provide some breathing room.
Cash flow is critical, according to Frank LaMonaca, a mentor at SCORE, a nonprofit and Small Business Administration resource partner. “Businesses don’t fail because of reasonable lending rates. When things go wrong, they fail because of a lack of liquidity,” Ramonaca said. Small business owners “should really focus on cash flow. That’s what helps them survive every day and get through any little issues,” he said.
Avoid balloon payments
For borrowers whose loans include a one-time payment at the end of the loan term, refinancing can avoid large cash outlays, often referred to as balloon payments.
“If you’re in this situation, always be on the lookout for opportunities to get out of balloon payments that make financial sense,” Ramonaca said. “My advice is that you start refinancing. [loan] At least one year before its expiration. “
Considerations When Refinancing a Business Loan
early repayment penalty
If you face a penalty for paying off an existing loan early, weigh the penalty fee against the benefit of the new loan to ensure you’re making the best financial move. In the future, opting for a loan with no upfront penalties or other types of exit fees can give you more flexibility to repay the loan at a time that is beneficial to you.
Business loans often include fees in addition to interest rates. E.g, Small Business Administration Loans A guarantee fee is usually required for each loan, including refinancing. It is common to add loan fees to the loan principal. While they may not result in a significant increase in your monthly payments or total loan amount, these fees need to be considered when weighing the pros and cons of refinancing.
your financial situation
The underwriting process for your refinance will be the same as any other business loan. You can save time and potentially money if you check the loan requirements on the lender’s website or speak with a representative before applying for a loan. Review your business and personal credit history, debt-to-income ratio, accounts receivable and annual income to help assess your eligibility for a new loan.
Small business owners can also contact nonprofits like SCORE for a free consultation, or speak with a local banker, accountant or business attorney to review the benefits of refinancing an existing business loan.