Obtaining funding from banks and credit unions had become severely challenging a few years back. Thousands of entrepreneurs had their loan applications rejected during the financial crunch of 2012 when over 82% of the banks did not ease their lending requirements for companies in need, and over 9% made them even more stringent.
Only about 8% of the banks in the USA allowed financing for entrepreneurs with poor credit scores. As a result, countless business owners had turned to high-cost lending agencies and personal lines of credit for financing their business.
Now that the economy is improving and business owners are once again welcome in the foyers of nationalized banks and credit unions, it might be time to consider refinancing those costly loans. The new reforms ensure that businesses are capable of receiving small business administration loans from US banks at interest rates of less than 6%.
Nonetheless, the situation is not the same for all the borrowers out there. How do you decide that it is time for your business to refinance old loans just because your competitors are doing the same? Is there a guarantee that your competitors are going to emerge as winners at the end of their refinancing ordeal as well? Several similar questions haunt entrepreneurs before making any financing decision. So, here we are, trying to answer the
Six critical questions that you should be asking before refinancing your debts.
Table of Contents
What is your interest?
No, we are not asking about your level of motivation for wanting to get the loans refinanced. We are talking about the interest rate that you are getting on the refinancing deal. The fixed-rate SBA loans can range from 5% to 6%, but that depends on various factors. It can depend on your loan amount, credit score, and the loan maturity date. It is almost always profitable for people to convert their loans from credit cards to SBA loans to cut down the balances. The current average Annual Payment Rate can hover around 12% to 13% for most small business credit cards. It shows why it is important for borrowers to shop around even when they think that their credit score or loan history is below par. Refinancing your loan with the help of a reputable lending party can save you considerably on APRs and interest rates per month.
What is the repayment status of your existing loans?
Check your current loan status. At the end of an amortization loan, interest rates take over the early payments, and the principal takes over the later ones. When you are paying only the principal on small business loans or even lines of credit, it does not make much sense to refinance your debts. At the end of the term, you have almost paid most of the interest, and you are just paying the principal! Refinancing an amortization loan at this stage will only increase your loan costs. It holds true for both personal loans and business loans with similar repayment terms.
Will the new loan cost you considerably?
Refinancing can apparently save you a significant amount of money when it comes to interests and APRs on your existing loans. However, the new credit will bear certain costs including processing fees, the amount of which will depend on the borrowed sum. Current SBA loans that are below $150,000 may not incur any charges, but more substantial amounts can cost you about 3% to 3.5% of the total loan amount. Never forget to factor in these costs and even charges of an appraisal while thinking about your refinancing options.
How does your financial profile look?
Banks may have loosened up a bit since the economic fiasco of 2012, but they are still pretty high-strung about the businesses they want to finance and the ones they do not. It can seem a little counter-intuitive to some since the current loans are already burdensome, and getting low-interest loans will help them clear their debt. The lending institutions will check your business profile, credit score, and your credit record to verify if you are eligible enough to take out a new low rate interest loan to pay off your outstanding creditors. Banks are not likely to close their doors on new borrowers either! Nonetheless, instead of fretting, you should check out the SBA advantage program that offers an alternative scoring system to businesses in need.
Can you stick to the ideal loan practices after refinancing?
People who are not finance-savvy are always at risk for turning an excellent loan opportunity into a wrong money decision. Money, contracts, and sales require astute financial knowledge, and you must not make any mistakes when it comes to post-refinancing loan decisions. Read the paperwork carefully and put down all T&Cs on paper before you walk out of the office with a new loan to power your business once again.
What kind of paperwork do you need for refinancing your debt?
Preparing your paperwork for refinancing is a lot like getting ready for battle. Let us say that without an accountant, the task is nothing short of impossible. You will need three consecutive years of tax returns and a year’s worth of bank statements for your business. It does not end there! You will have to furnish your personal bank statements along with the financial statements of the company. So, unless you are entirely sure that your business and your personal finances will benefit from refinancing, you should focus your time, effort, enthusiasm and resources elsewhere, say in expanding your business or acquiring a fresh market.
Refinancing might be a great way to restore the vigor in your business, but you should know that refinancing is not the only option and it is not suitable for everyone. Your short-term cash flow might improve even with a standard refinancing deal, but that will cost you and your business dearly in the long run. If necessary, consult your accountant and speak with non-profit debt counseling agencies to find out other ways that are better capable of rejuvenating your business finances.
Author bio: Charlie B is noted for advice regarding small business loans. He is a lawyer by profession and has been in this field for a long time. His posts are informative, and readers can get to understand many facts regarding debts and related matters.