Refinancing, when done correctly, can significantly boost your business. It can save you money, allow you to repay your loan more quickly, give you access to additional cash, or even free up your assets for other use.
Success, however, depends on creating alignment between your business goals, your risk profile, your financing vehicles, and the lender you select. This process all starts with understanding the pros and cons of your various refinancing options.
How to know if refinancing is right for you
The most common reason to refinance a loan is to save money by obtaining a loan with a lower interest rate. If interest rates have dropped or your business situation, including your credit, has improved, you may be able to obtain a lower interest rate.
There are other common reasons to refinance a loan, such as refinancing to a fixed rate loan from a variable rate loan, accessing the equity in your commercial property with a cash-out refinance, or avoiding a balloon payment on your current mortgage that will be coming due soon.
You can also move from one financing type or class to another to pay off a construction loan with permanent financing, unencumber an asset by removing its use as collateral, or perhaps replace a long-term loan with a more flexible working capital line of credit.
The key is to understand that you have hundreds of options for how you can refinance your current debt. By comparing your goals against the pros and cons of each financing vehicle you can find the option that is best for your business.
What you’ll need to refinance your loans
What you’ll need to refinance your loan depends on what type of financing you’re applying for. Sometimes the lender will want to check your business credit (and may check your personal credit as well if you are personally guaranteeing the loan). Lenders may also require financial statements such as profit and loss statements, balance sheets, tax returns, and cash flow statements for multiple time periods.
However, requirements will vary drastically based on the type of financing you are targeting. For factoring, for example, you may only need to provide information on your clients, accounts receivable, and the products you delivered to those clients. This form of financing is being secured by previous sales, so the lender is interested in your sales data rather than your credit score. As another example, hard money may require nothing else other than the address of your property.
Helpful hints for refinancing a loan
When planning to refinance, always start by clearly stating your goals. What is it that you want to achieve? The right financing vehicle to access capital may be different from the financing that will unencumber assets or lower your rates. So always start with your goals first.
Evaluate your current loan. Next, assess the amount of your payment, the interest you are paying and the number of years you have left on your loan. How do these compare to the details of the new options presented to you? Will refinancing move you significantly closer to your goals?
Be comprehensive. Include all of the commercial loans that you have into the refinancing picture. One great reason to refinance is loan consolidation. This allows you to pay one lump sum every month, rather than multiple payments, and by doing so often allows you to significantly lower your loan costs.
Shop around. Talk to multiple lenders and compare your commercial loans. The first option presented you might not be the best one. Some things to look for include:
• payment terms
• interest rates
• collateral needed to secure the loan
• additional fees and costs associated with refinancing
• how much closer the new financing will move you towards your goals
Refinancing can be a great opportunity or a huge waste of effort. Success depends on creating alignment between your business goals, your risk profile, your financing type, and the lender you select.
Our brokers are happy to chat through your options, give tips on what financing would best achieve your goals, and see which lenders are willing to approve you today. Just give us a call and we can launch the entire process within 5 minutes.