The recent economic downturn forced many small business owners to turn to alternative lending sources for financing instead of going through traditional banks. But even as these loans enabled many small and medium-sized businesses (SMBs) to get off the ground, those same SMBs faced reduced cash flow as a result of higher interest rates and harsh late fees, which impeded operation and future growth.
To alleviate those pressures, some small business owners had to refinance their loans. Refinancing is the process of changing your initial loan agreement to take advantage of a better interest rate. As a result, debt repayment is scheduled out across a more suitable time frame, which usually helps the company enjoy greater cash flow.
If you’re wondering whether now is the right time to refinance that small business loan, here are five reasons to help you decide.
1. You’re Still Making Mainly Interest Payments
Before taking steps to refinance your small business loan, it’s important to consider how much interest remains on the initial loan. In most loan agreements, the borrower spends months or even years making payments on the projected interest amount before starting to satisfy the loan principal. If your current loan payments are now going toward the principal each month rather than the interest, it might be more logical to refinance any other debts that have a greater amount of unpaid interest.
2. You’re in It for the Long Haul
Refinancing can be a great way to boost company cash flow while reducing the amount of restitution going toward interest each month. However, the fees involved in refinancing can put a serious burden on the small business owner’s already limited budget. Along with upfront interest charges, loan holders are often responsible for appraisal and application fees as well as closing costs.
The Small Business Administration (SBA), for example, charges 3% of the SBA-guaranteed portion for loans between 0,000 and 0,000, with higher fees for loans over 0,000. If you don’t plan to own your company long enough to recuperate these additional costs, it may not be logical to refinance your small business loan at this time.
3. You Have Good Credit
When was the last time you checked out your company credit score? Because a small business’ credit ranking can have a significant effect on its ability to refinance, owners should take time to review their scores before approaching lenders. Not only can a low rating affect your ability to secure a good interest rate, but it may also preclude you from refinancing all together.
If you do have credit issues, try to resolve them before refinancing. Repair the damage to your credit by lowering balances on business credit cards and disputing fraudulent credit charges, if any. Additionally, business owners should avoid closing cards with positive payment histories and low balances and keep their overall debt percentages low.
4. You Qualify for SBA Refinancing
It’s true that the SBA offers loans to entrepreneurs who may not qualify for alternative and bank lending. But just because an SBA loan was the right choice in the past doesn’t mean it’s meeting your company’s present needs. Fortunately, the SBA allows for refinancing in cases where the proposed loan offers the borrower a significant advantage in interest rates with the overall payment amount being reduced by at least 10%.
Additionally, debt may not be refinanced on a credit card or revolving line of credit. If your SBA loan is no longer meeting your needs and you meet the above criteria, don’t be afraid to apply to refinance your debt.
5. Your Current Lender Uses Predatory Practices
With traditional lenders turning away small businesses during the recession, it’s no surprise that many entrepreneurs sought financing from businesses with dishonest lending practices. Some signs of predatory lending practices include charging exceptionally high interest rates, levying abusive payment penalties and failing to disclose all fees at the outset. While normal loans often charge fees below 1%, it’s not uncommon for predatory lenders to ask for 5% of the loan amount or more. If you think your current lender is providing insufficient or false disclosure regarding your loan, you may want to refinance with a new creditor.
If one or more of the above criteria applies to your small business, the time may be right to refinance your loan. However, it’s important that owners do their research before choosing a bank or lender. By investigating each prospect thoroughly and avoiding those with fraudulent or predatory practices, you can ensure that you get the best available rate for your business.
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