Refinance Business Debt Checklist: 5 Steps to Maximize Your Approval Odds

As a small business owner, you know that the management of your current business debts is an ongoing process of balancing all your debts against the amount of cash that is available to you to pay those debts off at any given moment. In many cases, this involves juggling several small business loans, the potentially unpredictable monthly payments associated with them, as well as the interest rates associated with them, which will usually result in cash flow difficulties for you.

In some instances, the smart move isn't to take on more debt, it's to refinance business debt. Refinancing allows you to replace current loans with a new loan that may have better terms, such as a lower interest rate, longer repayment term, or more manageable monthly payments.

When done properly, refinancing business debts can improve the overall financial position of a business as well as enable the business owner to invest more of their cash into making their business operate successfully rather than just using cash from their jobs to meet their day-to-day operating costs.

This article walks you through a practical, five-step refinance business debt checklist designed to enhance your chances of approval. If you're considering loan refinancing, including options like an SBA loan to refinance debt or an SBA debt refinance, this checklist will help you prepare well in advance.

Understanding What It Means to Refinance Business Debt

To refinance business debt means using one loan to pay off another loan or loans, usually with the intent of changing how much interest you are paying on those loans.

For example:

• You could refinance to get a loan with lower interest rates, which would lower the interest amount you pay over time.

• You could refinance for a longer loan term, which would lower the amount of your monthly payment.

• You could combine several existing loans into one loan when you refinance. This would allow you to create a more straightforward process for tracking payments and reduce the confusion of having multiple monthly payment due dates, basically debt consolidation.

Generally, SMEs (small businesses) often use their refinancing options in combination with working capital loans, equipment loans, commercial real estate loans and business lines of credit to create better cash flow across all financing options.

Among refinancing options, SBA refinancing is a popular option because it may provide more favorable loan terms through federal support programs.

SBA Refinancing Options: What You Should Know

You may be eligible to refinance your existing debt using various loan programs, including the U.S. Small Business Administration's (SBA) various loan products:

• SBA 7(a) Loan – A flexible type of loan program that provides businesses with working capital and potentially allow for a refinance of some of the company's existing debt. In order to apply for a refinance SBA loan, the applicant must demonstrate that they have explored all other available loan options before seeking an SBA refinance loan.

• SBA 504 Loan – A long-term fixed-rate loan primarily designed for the purchase of large commercial real estate. However, it can also be used to refinance business debt under certain circumstances. The SBA's 504 program has several restrictions on the use of funds and requires documentation proving eligibility.

In late 2024, the SBA implemented updates to make the 504 Debt Refinancing Program more flexible, including increased loan-to-value ratios and broader use of funds for business expenses.

However, not all types of loans will qualify for SBA refinancing.

Maximizing Approval Odds When You Refinance Business Debt

Following are the 5 strategic steps to help small business owners maximize their approval odds when they're planning to refinance business debt:

Step 1: Review Your Existing Debt Thoroughly

Before seeking to refinance current business debt, you need a very good understanding of what you pay and why. You can do this by creating a detailed business debt list.

Start by listing:

• Loan type (e.g., business loan, equipment loan, business line of credit)

• Loan amount

• Interest rate

• Monthly payments

• Loan term

• Remaining balance

• Any prepayment penalties

By creating this detailed debt list, you will have an easy time identifying which loans have the largest payments and/or which loans can be refinanced because their interest rates are month-to-month.

Comparatively, credit card loans or working capital loans (very short-term) typically carry very high-interest rates. These loans would be ideal candidates for being refinanced to a lower cost/less complicated loan.

Identify Pain Points

Ask yourself:

• Are monthly payments too high compared to your cash flow?

• Is your repayment schedule mismatched with incoming revenue?

• Do you have overlapping loans with different lenders?

• Are you paying penalties for early repayment?

If you are able to identify and answer honestly to all the above, it will greatly help make a stronger refinancing application. Lenders will be able to see that you understand your obligations, and, as a result, how a refinance may benefit your business.

Step 2: Assess Key Financial Metrics That Lenders Care About

Lenders are concerned with many items aside from the borrowing history, including whether the firm has the financial ability to manage a new loan prudently.

Debt Service Coverage Ratio (DSCR)

The Debt Service Coverage Ratio (DSCR) is an indicator of a business' ability to generate sufficient cash to pay all debt payments. The fundamental calculation of the DSCR is a ratio. The basic formula is:

DSCR = Net Operating Income / Total Debt Service

For instance, if one were to look at a DSCR of 1.50, that is an indication that one has 1.5 times the amount of cash needed to meet the business' debt payments. Most lenders will look for a DSCR of at least 1.25 to 1.50.

A high DSCR is an indicator to a lender that a business can make its loan payments, even when its revenue pattern experiences fluctuations.

Cash Flow and Working Capital

A steady cash flow pattern will improve the chances refinancing. Lenders will look at the business':

• Profit & Loss statements

• Bank statements

• Cash flow forecasts

• They want to ensure that your operating income can handle your loan obligations.

• Credit Scores

Business credit score, as well as the owner's personal credit score, both are crucial. While SBA Loans do not require extremely high credit score as some traditional sources, having a solid business credit score does provide more competitive loan terms over those with poorer credit scores.

Other Financial Metrics

• Debt-to-income ratio

• Liquidity ratios

• Revenue and growth trends

• EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

Step 3: Gather and Organize All Required Loan Documentation

Documentation quality and completeness can make or break your refinance business debt application. While the actual requirements vary for each lender, they may ask you for the following core documents:

• Business and personal tax returns

• Profit & Loss statements

• Cash flow statements

• Bank statements (typically 12–24 months)

• Copies of all existing loan agreements

• Business formation documents (articles of incorporation, operating agreements)

• Any financial projections you may have

• For certain SBA refinancing situations, you will also need:

1. SBA forms such as Form 1919 (for personal history) and Form 413 (personal financial statement)

2. Evidence of all business debts you wish to refinance

SBA and other lenders will carefully review the above documents that you are submitting to establish your eligibility, ability to pay back the debt, and how much/how long you can finance your business. Failure to include one or more of the required documents or incompleteness of the required information will lengthen the approval process and could cause a denial.

Step 4: Evaluate If SBA Refinancing Suits Your Situation

SBA loans have attractive terms, but there are some strict requirements associated with eligibility. However, they differ in terms of what you want to refinance.

An SBA loan can be used to refinance existing debt through the 7(a) program if the refinanced debt will improve your company's cash flow and/or create a more competitive financial position by obtaining funds from other sources.

SBA 504 loan program allows businesses to refinance long-term ‘qualified debt' on tangible assets like real estate or equipment based upon the original intent of the long-term debt, as well as the length of time that the business has been in operation.

Requirements for Eligibility: In order to qualify, the business must meet SBA size standards for small businesses, be located in the United States, have adequate equity invested in the business, meet SBA's minimum credit criteria, and show that refinancing would benefit both cash flow and financial stability.

Refinancing with the SBA may provide you with extended repayment terms, competitive rates, and beneficial fixed-rate loans that can help improve your cash flow management planning.

Step 5: Choose the Right Lender and Time Your Loan Application

Choosing the right lender will have a major impact on whether or not your loan application is approved for refinancing.

Lender Types

You may choose to refinance business debt through the following sources: -

• Traditional Banks

• SBA Lenders

• Online Lenders

• Community Development Financial Institutions (CDFIs)

• Credit Unions

Each lender has its own requirements, so you may want to compare the various lenders.

Timing Factors

It's important to apply for a refinance when you have the best chance of being approved. The following factors will result in a greater likelihood of being approved when you refinance business debt:

• Interest rate trends: Lower rates can improve monthly payment savings.

• Business performance cycles: Apply when your cash flow is strong.

• Economic conditions: Broad market rates can affect underwriting standards.

Communicate With Lenders Early

Many small business owners mistakenly believe that the beginning of the process is the application itself. However, communicating with your lender early on about your refinance plan will give you valuable insight into what the lender requires for you to qualify for refinancing, as well as what supporting documentation you will be required to provide. This will help eliminate any surprises during the application process.

Common Mistakes to Avoid When You Refinance Business Debt

Even with preparation, businesses can stumble when they refinance business debt. It is best to avoid the following:

• Applying without reviewing your financial metrics

• Ignoring prepayment penalties on your current loan

• Forgetting to check eligibility rules for SBA debt refinance

• Submitting incomplete or poorly organized documentation

• Underestimating the importance of cash flow projections

Conclusion

By following the five-step checklist, small business owners can successfully position themselves in the best possible light when applying to refinance business debt. Strategic use of these five steps can help them in their business growth. However, they must also be mindful of the common mistakes that entrepreneurs make when they refinance business debt.

In addition, being proactive, organized and thoughtful about the refinancing process will significantly increase a business' chances of receiving approval when they apply for traditional bank financing, SBA loan programs or any other types of financing available to them.