When we hear the term “refinancing” most of us think of home mortgages. However, refinancing is available to companies that want to improve their loans on commercial property as well. Refinancing is essentially replacing one loan with another. It may not sound ideal at the outset, but it’s a useful tool to reduce cost of money and in many cases, to lower the cost of monthly payments among other benefits.
As your business matures, loans you took out in the past can be updated to reflect your current success. Often, the longer a business operates, the better loan terms become. You can also improve personal and business credit scores over time, making your application more attractive.
Refinancing can lower your interest rate, let you cash in on equity, and help you get rid of debt faster. But, you should evaluate the cost of refinancing as carefully as with your original loan. Each lender will have their own stipulations and incentives, and your commercial loan broker will explain the details of each refinancing option available to your business.
It’s important to keep a few things in mind when considering a refinance:
- Prepayment penalties from your old lender
- Closing costs from the new lender
- The fact that not all loans are eligible for refinancing
Here, we’ll give an overview of the types of refinancing available.
Federally Backed Refinance Loans
The SBA and the USDA both have loan programs to benefit commercial property owners. They act as guarantors on a portion of privately offered business loans to reduce the risk to the lender if the borrower defaults. That is an incentive to lenders so they can be more flexible with terms and eligibility. Both agencies offer up to $5.5M in financing.
Federal refinancing could be the right tool for you if:
- You’re a for-profit company that fits the eligibility requirements of the SBA, and you have a demonstrated history of three years of on-time payments on the loan you’re refinancing.
- You’re a U.S. citizen or permanent resident who owns and operates a business in a rural area of the country, and it’s been a year since you took out the original loan.
You can change your loan and get extra funding through what’s called “cash-out” refinancing. This type of refinancing involves taking out a second loan that not only pays off the original loan, but also gives you cash on the equity of the property being refinanced. So, if you had an initial loan of $500,000 but the property has increased in value to $750,000, you can refinance to get an extra $250,000 cash.
Cash-out refinancing is a good option if:
- You have real estate property that has increased in value over your initial loan amount, and you need more working capital to put back into your business.
- You want to remodel or renovate your property to increase equity, resale value, or expand to a new property.
Traditional Commercial Loans
The main reason companies use traditional commercial loans is to get a lower interest rate. If you’re in a position to refinance because you’ve improved your credit or property value, the rates you qualify for now could be better than your original loan. You can also refinance to extend the term of a loan so you have more time to pay. That can be a good way to handle balloon or lump sum payments.
Consider a traditional commercial loan if:
- You qualify for a better interest rate than the rate on the loan you originally took out, and you want lower monthly payments.
- You want to avoid a balloon payment on a loan that’s coming due and are willing to extend payments over a longer period.
Business owners choose to go with conduit or Commercial Mortgage-Backed Security (CMBS) loans because they typically have fixed and lower interest rates than traditional commercial loans. They differ from other loans in that they’re a group of loans packaged together and sold to secondary investors.
A CMBS is in the form of bonds, usually within a trust. They can include mixed real estate like hotels, apartments, warehouses, and factories. They’re regulated by the SEC and FINRA.
A CMBS or conduit loan can work for you if:
- You goal is to refinance high-value properties upwards of $1M and want more flexibility to negotiate loan terms.
- You want a fixed interest rate loan that you can pay off in 10 years or less and need financing with lenient credit requirements.
One alternative to refinancing is restructuring. Although the two are similar, refinancing replaces one loan with another. Restructuring negotiates the terms of your current loan with its original lender. You may still have to sign a new loan agreement, but you’ll do so with the lender you’re already using. You can learn more about both by contacting our professional brokers.
To recap, commercial loan refinancing is the process of taking out a new loan to repay an old loan. Before you consider refinancing, it’s a good idea to speak with a professional loan broker who can help you decide which type of refinancing will benefit your business the most. Refinancing isn’t always the best option. We can walk you through different financing plans if refinancing isn’t the right fit.