When your business needs access to capital quickly, it’s easy for the particulars of the loan rates and interests to get lost into the hustles of trying to get the cash you need.
The dark reality starts to set in once you begin making regular payments, and compounding interests sets in.
Fortunately, you can avoid getting stuck with the expensive payments and high-interest debts through loan refinancing.
What Is Loan Refinancing?
Loan refinancing is taking out a new loan to pay off one or more loans.
In most cases, entrepreneurs refinance their small business loans to reduce their repayment amount and get access to lower interest rates.
Similar to loans, there are several refinancing options available in the market, including banks, crowdfunding, or even your lender. Alternatively, you can choose to go the less traditional way and choose to source from credit market places.
For instance, Lendingclub runs a credit check (Based on this review), on your financials to determine whether you qualify for a refinancing option.
Now that you have an idea of what is refinancing and where you can get one let’s look at the top 4 reasons why you would need to refinance your small business loan.
Whether you have a small business loan, an equipment loan, or a merchant cash advance, you need to compare the details of your current debt against the refinancing options available for you today.
For instance, if the current SBA loan rates have fallen since you last took a loan, you might save money on interest rates by refinancing your loan using the current competitive rates and terms available.
Though refinancing an existing debt when you’re eligible for a lower cost debt option seems like a no brainer, it’s also necessary that you exhaustively review the total costs and terms, and this includes the total finance charge, service fees, listing fees, and even pre- closure costs.
If the cost of the new loan is lower than the current one, they, by all means, you should refinance your existing business loan.
Lower interest rates will translate to lower monthly payments, and this is particularly true if your refinanced small business loan has a similar payoff date as the old loan.
Lower monthly payments grant your business better cash flow management and avail more money for other projects.
Shorten The Loan Term
There are several models for refinancing your business loan, and one of them is refinancing into a shorter-term loan as opposed to extending repayment.
For instance, if you’ve an equipment loan that you need to clear in 20 years, you can refinance the loan into a 10-year loan that will come at a lower interest rate.
Small businesses often face plenty of financial challenges and require several types of business loans to stay afloat.
While we are not against the idea of acquiring loans to promote your business, getting too many of these can throw your business into a conundrum, especially if you source from different lenders.
See, having too many loans, each with different repayment rates and requirements, can offset your business in the fact that you might be making losses in paying up the varying interest rates and fees.
With a refinancing option, however, you get to consolidate all your loans into a single loan.
This is particularly handy for small businesses with multiple loans.
A consolidated loan will let you get lower interest rates on the overall loan, and above all, it allows you keep an easier track of the payments and the loans.
Even so, the ability to access refinancing does not always necessarily mean it’s a good idea.
You need to consider the overall effect on your finances and see whether refinancing makes sense at all.
In particular, you should be extra cautious if your loan term is a short one and about to come to an end.