Approximately 627,000 new businesses open in the United States each year. And each one of those businesses needs startup funds from somewhere.

For most businesses, that money comes from small business loans. But as their companies grow, that initial loan might end up tying up resources.

The more money you have tied up in debt, the less you have to grow and expand your business. Worse, those high-interest rates charged by lenders can leave you paying more each month than you should.

The easiest way to save money and free up funds to grow your business is by refinancing that business loan.

But if you’ve never considered the option, you probably have a few lingering questions about how to get the process started.

Well, you’re not alone. We’ve put together a simple guide that explains the steps to refinance your business and take control of your funds.

Understand What Refinancing Can and Can’t Do

Refinancing a loan allows you to reduce your overall debt.

How? By lowering your interest rate!

When you take out a loan, your monthly payments are split into two payment types. One portion goes to the principal, and the other goes to the interest accrued on that principal.

You’ll make that payment as long as you keep the loan.

As you pay down the principal amount, the money you pay in interest will decrease. But that doesn’t mean you can’t still refinance to get a lower rate.

Refinancing can also increase the amount of loan money you receive. Say you wanted to expand your business and needed a little extra cash to make the project happen.

A new loan will help, but the interest rate you qualify for based on your company’s performance may be significantly lower. If you are eligible, you can then borrow enough to refinance existing debt while also taking out a little extra to cover those new expenses.

Refinancing cannot, however, get you out of debt completely. Only paying off your loans without borrowing new money can do that.

Establish Your Refinance Goal

When you refinance a loan, the point is to reduce the amount of interest you owe on the loan. This, in turn, lowers your monthly payments and saves you money.

But before you can find a new lender, you need to know what you want to achieve by refinancing the loan.

Look at your company’s existing debt and decide on what you want the new loan to do.

Do you want to lower your monthly payments or are you looking to consolidate multiple loans from different lenders?

Understanding your end goal, beyond just saving money, will help you find the right refinancing option.

It may also help to look at your current finances, especially if you’re hoping to consolidate debt.

Look at your monthly expenses, estimated gains, and the total amount you pay to lenders currently. Use this information to determine how much you can reasonably afford on a new loan each month.

Though you’ll likely refinance to a lower average interest rate and save money, it’s still helpful to know the minimum amount of a reduction you’re willing to take.

Remember, you’ll be getting quotes from different lenders. You’ll need a baseline to compare the options against.

Understand the Repayment Penalties

Unfortunately, most business loans include early prepayment penalties. What this means, is that you’ll be charged a fee for paying off the balance of the loan before the end of the loan term.

Why? Because lenders ultimately want to make money on your loan. The longer they can charge you that high-interest rate, the more money they make.

When borrowers refinance a business loan, it represents a loss for the lender. So, they punish you by charging a prepayment penalty.

Knowing what the repayment penalty is on each loan that you’re refinancing will help you decide how much to borrow on the new loan.

The exact prepayment fee amount will vary from lender to lender. For example, SBA loans typically only charge a prepayment fee if the principal is paid off within the first three years of the loan.

If that amount is too high, it might be best to wait to refinance until the prepayment penalty period has passed.

Check Your Business Credit Score

Businesses, like their owners, have credit scores which help determine the interest rate you get on loans.

Before you apply, take the time to check your business’ credit score.

If the score is low, you may not be able to refinance at a great rate. If it’s high, chances are good that you’ll refinance into a lower interest rate.

If for whatever reason, you’re unsatisfied with your score, you may want to wait to refinance that business loan.

Start paying down existing debts, ask business credit card companies for a higher limit to increase the total available credit, and make sure to pay bills on time.

These steps will raise the business’s credit score slowly, but it will go up.

Start Shopping Around

Once you understand the terms of your original loan and how they’ll impact your refinancing efforts you can start shopping around.

Get quotes from different lenders and keep an eye on the average interest rates for the types of loans you’re interested in.

When you start shopping, you’ll need to see how each lender can work with your business.

Explain the industry you work in and make sure the lender can work with your company. Not all lenders offer loans to all sectors and industries.

Ask each lender for the details of the loan. This means the loan terms, late payment fees, early prepayment penalties, and interest rates.

You’ll also need to make sure they understand that you’re using the money to refinance existing loans. And unfortunately, this can whittle down your list of options.

Some may not be interested in helping you refinance a business loan. Others may have unrealistic expectations for your posted collateral.

The important part is that you take the time to get as many details as possible about each option. Without the details, you can’t make a smart decision for your business.

Evaluate Your Options

Once you have a list of lenders you’re interested in working with, start comparing your options.

Compare the available interest rates as well as the loan principal and select the lowest ones you’re interested in.

Then, look at the prepayment penalties, loan terms, and estimated monthly payments.

Once you have these lined up, you’ll have a better idea of which lenders you’ll want to work with. Keep in mind it’s helpful to pick out two or three lenders that meet your needs.

This way, if one denies your loan, you’ll have another potential lender to work with.

Apply for the Loan That Fits Your Needs

Once you’ve gone through your options, it’s time to start applying for that loan. You should be able to do this online without hassle.

Enter your information telling the lender about your business, the industry you serve and the types of loans you’re looking for.

They’ll review your information and ask for verification of your business’s income as well as some information on the outstanding debt you’re looking to refinance.

Once they have the information, you’ll receive a detailed loan agreement that outlines the terms, any fees and penalties, expected monthly payment amounts, and any other relevant details.

If you agree to the terms and the contract, accept the loan and start refinancing your business! You’ll receive the money in a few days.

Give a Heads Up to Your Original Lender

When you’re ready to pay off your original loan in full, you need to notify the lender. Let them know that you’ll be repaying the principal and any applicable prepayment fees.

Unfortunately, some lenders may not be willing to process your prepayment amount in a timely manner. This means you’ll need to monitor your account frequently to make sure they’re not merely withdrawing the regular payments from your bank.

If they don’t process the payment, don’t hesitate to reach out. It may be nothing more than an oversight. But it could be an attempt to get one more interest payment out of you.

If they fight back or are belligerent, stand your ground. You have every right to refinance a business loan.

Most lenders will work with you willingly. Others might need a stronger hand.

Start Making Regular Payments on Your New Loan

Once your original loan is paid off in full, your only responsibility is to send monthly payments to your new lender.

You’ll be expected to make payments on a regular basis according to the terms of your loan agreement. If you miss a payment, contact the lender as soon as possible.

Though you may be subject to a late fee, some lenders may offer a grace period, especially at the beginning when accounts are just getting set up.

The important thing is to communicate.

When Should a Business Refinance?

Refinancing a loan can be a difficult decision. After all, the thought of taking on more debt, even if it’s different, can be overwhelming. But there are times when it makes sense.

If you took out a short-term loan with an incredibly high-interest rate right as you opened your doors, your monthly payments might be too high.

The last thing any business needs is a loan that puts a strain on their operating budget.

Similarly, if your business credit score and income have improved, you may qualify for better loan terms.

This can save you hundreds each month just on interest payments alone.

Even if you don’t qualify for a lower interest rate, but do qualify for a longer loan term, refinancing can still make sense.

Longer loan terms mean your payments are broken up into more monthly installments.

This means lower payments for the life of the loan. If you’re struggling to make payments on a short-term loan, start considering your options.

If after shopping around, you find out that you qualify for lower interest rates, refinancing makes sense. You can always take the time to think about it.

There’s no reason to rush your decision.

When Is Refinancing Not an Option?

Though refinancing can help most businesses, there are situations where it can hurt small businesses.

No company should try to refinance their debt if the amount they’d save in interest payments over the course of the loan is less than the prepayment penalty.

You should also keep the original loan if refinancing would not be significantly lower your monthly payments.

Taking out a new loan would be, at best, redundant. At worst, it could cost you hundreds upfront in origination fees, making refinancing more expensive in the long run.

The best thing you can do is explore your options. The worst thing that can happen is a lender denies you the loan.

You’ll still have your existing loan money and can evaluate your budget to accommodate any payments you need to make for the life of the loan.

Take Steps to Refinance Your Business Loan

If you think your business can benefit from refinancing a loan, don’t put it off!

Take steps to refinance your business loan and see how much money you can save each month.

Start looking at your options and review your current loan for prepayment information.

If you’re ready to start the refinancing process, apply online as soon as possible. Our experienced loan officers will examine your information quickly and get back to you with a quote in minutes.

At Dealstruck, we know you’re in business to make money. Let us help you save a little by refinancing today.