Refinancing a business loan is a crucial decision that needs to be considered thoroughly. It can increase liquidity in the short run and allows a revision of interest rates in case the current rates are too high. There are some important points to consider before one applies to refinance a business loan:
The main advantages of Refinancing a Business Loan:
- Lower Interest Rates: If the monthly payments are too high because of the interest rate, one can consider refinancing in order to reduce the monthly payment burden.
- Increased Cash Flow: Refinancing a loan can increase liquidity which can enable a business to spend on growth oriented activities instead of debt-servicing.
The basic steps of refinancing a business loan are:
- Define Goals: Understand what you want from a refinancing deal. It could mean lower interest rates and consequently lower monthly payments or improved credit score. If improved cash flow is the goal, then that could also be achieved by speaking to vendors instead of refinancing. This is why one must be certain that refinancing is the only way to achieve the goal.
- Review Finances: It’s essential to review company financials preferably with an accountant, before refinancing. Important documents such as balance sheet, profit & loss statement, bank statements up to six months, tax returns and credit score should be analyzed carefully.
- Find the Right Vendor: Before approaching a vendor for refinancing, it is important to consider processing charges and application charges for the new loan. An early exit penalty from the old vendor may also be charged if one is paying back the loan before completion of tenure.
- Apply for Loan: Various documents are required such as the business financials, balance sheet, profit & loss statements, business licenses, business and personal tax returns, etc.
So after due consideration a business can go for refinancing a business loan.