Tips to Qualify for Some of the Best Refinance Loans for Your Business

Key Factors Lenders Evaluate in a Loan Application

To qualify for the best refinance loans, it helps to understand the key factors that lenders look at first. You should keep in mind that these may vary.  

1. Time In Business

Lenders consider your time in business when you apply for a new loan to refinance your existing debt. Having a proven track record and several years of experience under your belt can help your loan application. Lenders generally want a minimum of two years of operating history.

2. Debt-Service Coverage Ratio (DSCR)

Your debt-service coverage ratio (DSCR) helps lenders assess the financial health of your business. It's a metric that shows the ability to repay your debt. To calculate your DSCR, Chase notes that you take your net operating income and divide it by your total debt payment obligations.

According to Chase, banks typically want a minimum DSCR of 1.25.

If you have a strong DSCR, that may help you qualify for the best refinance loans with low rates and favorable repayment terms.

3. Debt-to-Income (DTI) Ratio

For sole proprietors or small business owners providing personal guarantees, lenders may look at your debt-to-income (DTI) ratio. According to the Consumer Financial Protection Bureau (CFPB), the debt-to-income ratio is a metric that takes your total monthly debt obligations and divides them by gross monthly income.

Each lender and type of loan product may have a different DTI requirement, but generally, the lower, the better.

4. Cash Flow

Cash flow can be a consistent issue for small business owners operating with thin profit margins. Though some dips might be par for the course, lenders evaluate your cash flow to make sure you have the funds to make monthly payments on the refinance loan.

5. Annual Revenue

To qualify for the best refinance loans, borrowers typically need to meet specific annual revenue requirements. Lenders use revenue, in addition to cash flow, to assess financial health and to determine whether your business can comfortably afford monthly payments on the new loan.

6. Credit History

Your credit history shows lenders your behavior as a borrower. If you’ve made payments on time, that may help you qualify for the best refinance loans. Lenders may look at both your business and personal credit scores as part of the application process.

Most lenders have specific minimum credit score requirements for approval. Though you may qualify, having a stronger credit score can help you qualify for a lower interest rate.

7. Existing Loan Structure

If you’re looking at refinancing loans, lenders will review your existing loan structure, your current interest rates, repayment terms, and monthly payments. They’ll also look at your payment history and check for any potential prepayment penalties, which can affect the cost-effectiveness of refinancing. These factors can impact your ability to qualify for the best refinance loans.

8. Industry Risk

Another factor that lenders consider is industry risk. Not all industries have the same risk profile. Some tend to be more volatile, while others tend to be more stable. If your industry fluctuates based on economic conditions and seasonal changes, it may be considered riskier.

As a result, it may be challenging to qualify for the best refinance loans with low rates. If there is more risk, lenders may impose stricter requirements and charge higher interest rates.

9. Economic Conditions

Greater economic conditions can also impact what loan providers offer. Borrowing products don’t exist in a silo and market conditions can impact rates.

If you want to qualify for the best refinance loans, it’s not all in your control. However, there are some things you can do to be proactive and improve your chances of qualifying.

Tips to Qualify for the Best Refinance Loans

Refinancing can help streamline repayment and potentially save you money if you can secure a lower interest rate. To put yourself in the best position possible to qualify for the best refinance loans, here are steps you can take to improve your borrower profile.

1. Improve Credit Score

Your credit score is a major factor that lenders consider and has a significant impact on rates. To help you qualify for the best refinance loans, work on improving your credit score.

First, check both your personal and business credit reports. Personal credit reports are accessible through AnnualCreditReport.com. Business credit reports are available through the three major business credit bureaus, which are Experian Business, Equifax Small Business, and Dun & Bradstreet (D&B).

2. Strengthen Your Financial Foundation

Lenders don’t just look at your revenue and cash flow. They also look at consistency and stability. Showing consistent income, solid cash flow, and low debt balances can strengthen your financial foundation. Focus on paying down existing balances to improve your debt-service coverage ratio and debt-to-income ratio. Increasing revenue can also benefit your application. 

3. Research Lenders

Just like every borrower is unique, so is every lender. No two have the exact same eligibility requirements or underwriting criteria. Qualifying for the best refinance loans isn’t about luck, it’s about research and preparation.

Know where you stand financially and with your credit. From there, research refinance lenders to see if you meet the minimum requirements. If so, check various options and review the loan terms, interest rates, and if there are loan origination fees.

Refinancing options may be available from banks or financial services providers, credit unions, the Small Business Administration (SBA), and online lenders.

4. Apply at the Right Time

Timing the application process may help you qualify for the best refinance loans. For example, when your cash flow is strong, revenue is consistent, and credit is in good shape, that’s a great time to apply. Additionally, if economic conditions change, that could help the interest rate environment, which can benefit you as a borrower.

Checklist for Your Loan Application

To qualify for the best refinance rates, it makes sense to prepare ahead of time. The application process can be easier if you have the right documents and information ready. These can include:

• Employer Identification Number (EIN)
• Proof of ownership
• Business license or permit
• Tax returns
• Balance sheet statement
• Cash flow statement
• Profit and loss statement
• Bank statements
• Annual revenue
• Current business debt
• Monthly debt payments
• Credit card balances
• Desired loan amount
• Loan purpose

• Business plan

The exact information and supporting documentation you’ll need will vary by lender and the type of loan. Putting all of this together in a physical or digital folder for easy access can simplify the process when it’s time to submit your application.

Be Aware of the Risks of Refinancing Business Debt

Business owners looking to refinance debt often do so to help lower interest costs or change the terms of their loans. While there are some clear benefits to refinancing, prudent entrepreneurs should be aware of the risks as well.

Do the math and review total costs. You may qualify for a lower interest rate, but that doesn’t necessarily mean you’ll save money. You might lengthen the repayment period, or face prepayment penalties and fees, which could offset any potential savings.

If you lock into a fixed rate, understand that rates could drop in the future and you’ll be locked into that specific rate. That said, a fixed rate can insulate you from rising interest rates.

Evaluate how these monthly payments will affect your cash flow not just in the short term but in the long term, too. Also note that when you apply for a refinance loan, your credit score may take a dip due to a hard inquiry.

Lastly, borrowers must closely read the fine print and understand if there are any loan covenants, which could put certain agreements or restrictions in place.

Final Thoughts

Taking out a refinancing loan to restructure your business debt can make sense if high interest payments are putting a strain on your cash flow. But only if you qualify for a lower interest rate and the overall costs and fees involved with the new loan don’t cancel out any savings.

It’s also essential to review the repayment terms closely and understand their impact on total borrowing costs. You may qualify for lower rates but extend the repayment term to reduce monthly payments. While that can help in the short term, it adds more interest charges in the long term.

Before moving forward, take steps to improve your credit and financial profile and understand the pros and cons of taking out a refinance loan.