When is the right time to refinance your business loan?
After you’ve been in business for a while, you’ll likely come to a point where it’s time to refinance your business loan. It can particularly be in your company’s best interest if it didn’t start out with the best possible loan.
When is it time to consider refinancing your business loan? The simple answer is: when refinancing would let you make moves to grow or improve your company. This often means, whenever refinancing would result in you saving money.
But what are the specific times in which you should refinance?
1. Your credit score got much better
When you apply for an initial loan, lenders use your personal and business credit scores to help predict your ability to repay a loan. That’s no different when it comes to refinancing. A change in your credit history can have a large effect on the price of the refinanced loan.
So it’s in the best interest of you and your company to track your credit reports, perhaps using an online service, and time your application for refinancing with a peak in your credit. If you’ve got multiple debts, paying off one loan in its entirety can lead to a boost in your credit score. That boost could save you thousands on a business loan.
Getting a business loan with bad credit doesn’t mean your company will always have to deal with the high interest that comes with its initial borrowing. Make sure you’re aware of the different criteria that factor into a credit score and strike when you’re at your peak.
2. You need to free up cash
One of the most important reasons to refinance your business loan is that your current monthly payments are too high. They might be high for any number of reasons. Likely, your initial loan was over a shorter term even with a higher interest rate, making payments very expensive.
But you need money to make your business grow. You need to be able to hire new employees, purchase new equipment, expand into new markets, and take advantage of short-term financial opportunities.
To help free up cash, you could refinance with a loan that extends the payment period as well as lowers the interest. This new loan would lead to much more manageable monthly payments. You may determine that paying more interest over the course of the loan’s term is worth it in exchange for cash leeway on a monthly basis.
3. Your business is growing
Another great time to refinance is when your business is expanding. Look over your company’s financial statements. Once you’ve shown a long period of sustained growth, it could be a smart time to refinance your loans. Just like they do with your credit scores, lenders will examine your profit-loss calculations when it comes time to determine your creditworthiness. So an improvement in revenue can mean a lower interest rate and better terms on your business loan.
Plus, consider your expanding revenue in conjunction with lowered monthly payments. Those two factors at the same time can mean a huge increase in discretionary spending every month. Think of all you can do to increase your profits even more with that extra cash every month.
4. Your existing loans can benefit from consolidation
Perhaps you’ve taken out multiple loans to keep your company on the right track. A start-up loan, a cash advance after an emergency, an equipment loan, and a couple of long-term traditional loans. It can be difficult, if not outright exhausting, for a busy business owner to keep these debts straight and make the payments in the right amounts on the right days. Missing a payment will hurt your credit reports, which means higher interest rates on future loans.
If your finances are overly complicated and it’s affecting your ability to keep the books, you could consider refinancing multiple loans into one consolidated payment. That way, your repayment is simple and you can spend your mental energy on doing the things that will grow your business instead of on unnecessarily complicated payment work.
5. You hit a milestone
Hitting certain milestones can make your business qualify for types of loans it wasn’t eligible for at its outset. Low-interest SBA loans, for example, are only granted to companies with two years in business, in addition to other requirements.
Another possible milestone is reaching $100,000 a year in revenue for the first time. It could be when you reach a certain number of repeat customers. Reaching a goal number of consecutive profitable months. Maybe it’s when you’ve reached the staff size you were hoping for. It’s a milestone when your business credit score gets a boost over 700.
Once you’ve hit one of these milestones (or others), it’s like you’ve unlocked a new room full of borrowing possibilities. Passing them can be a great time to refinance. Not only do some milestones make your company eligible for loans they may not have been eligible for in the past, they also provide concrete evidence of your business’s success, which makes it more appealing to possible lenders.
6. The market has improved
This one is beyond your control, but better market conditions can save your business money; it’s worth it to pay close attention. In times of general economic growth, either in your geographic area or in the country as a whole, you may be able to secure a refinanced loan at a lower interest rate.
Remember, lending a company money is, essentially, a bet. And a strong economy is an environment in which more bets than usual are coming up in favor of the lenders.
This can also be the case with your industry specifically. If your research indicates that businesses like yours are flourishing, it might mean you have better loan options. If you’re refinancing, choosing a time when the environment around your company is conducive to growth is wise.
Be aggressive about refinancing when it’s in your company’s best interest
Whether it’s to simplify your finances, save money every month, or take advantage of an improving situation, refinancing a business loan (or loans) is an important move to keep in mind for every smart business owner. Refinancing can help you stay on top of your debt, gain the ability to make the changes you need to grow, and give other important parts of your business the time and attention they deserve.