Should I Refinance My Commercial Loan?

Should I Refinance My Commercial Loan? If you own or manage a business and you carry debt such as mortgage loans, startup loans, or capital loans, there will inevitably come a time when you ask yourself this question. The answer depends on several factors, and because refinancing is a time-consuming process, you’ll want to carefully consider whether now is the right time to refinance your commercial loans. Make no mistake though, if the timing is right, refinancing can make a tremendous positive impact on your small business, so don’t shy away simply because of the effort involved. Also, don’t assume it’s too soon to do a refi either. Many businesses successfully refinance just a year after obtaining a loan (sometimes even sooner)—and save a bundle in the process.

First, let’s back up and make sure we define refinancing and its purposes. When you refinance a loan or loans, you’re borrowing new money and using it to pay off your old loans. The goal is to save money, get money, or both. Refinancing can involve debt consolidation, in which you take out one big loan at favorable terms to pay off two (or more) smaller loans that have less favorable terms. Or you can do a cash-out refinance for the purposes of accessing capital. Any way you slice it, the goal of refinancing is to increase cash flow—that is, put more money in your business’ proverbial pockets. And because cash flow is the lifeblood of your business, having regular access to it is integral to your success.

So, let’s discuss how to evaluate whether now is the optimal time to refinance your commercial loans.

Refinance a Commercial Loan: Timing Factors

As we mentioned, timing is a critical factor in determining whether you should refinance your commercial loans. Below are some time-sensitive factors to consider:

1. Lending Rates: What are the current rates for commercial debt refinancing? If rates are at least a point lower than your current rate(s), then it may be a good time to refinance. If market rates are less than a point below your current rate, the savings you’ll ultimately reap probably won’t be large enough to justify the time and energy you’ll devote to the process.
2. Age of the Loan: Many lenders require a loan go through a “seasoning” or waiting period of one year before being refinanced. Other lenders require just six months, and a few others require no seasoning at all. Find out what your lender requires before starting the process. If you’ve surpassed this period, and can otherwise justify the need for commercial debt refinancing, it might be a good time to refi.
3. How Long You Plan to Own the Business or Property: If you plan to keep your business or property long enough to recoup your closing costs and other related fees (and justify the time you spent on the refi process), it may make sense to refinance your commercial loan(s). To avoid wasting time later, be sure to ask for a detailed list of costs and fees from your lender upfront.

Refinance a Commercial Loan: Financial Factors

Your New Monthly Payment: Remember that a lower interest rate might not equal monthly savings. Depending on the structure of your loan, you might end up paying MORE per month even if you lower your interest rate. Scenarios in which this could occur include:

• A reduced loan term: going from 30-year loan to a 15-year loan would increase your monthly payments
• A cash-out loan: taking out a larger loan than the one you had to begin with in order to infuse your business with cash means you’ll bump up your monthly payments.

As noted above, you’ll want to know exactly what your commercial debt refinancing costs will be so you can weigh them against the savings you expect to recoup or the cash you plan to take out. Fees will be vary depending on the type of loan you plan to acquire, but they commonly include points (upfront interest charges, each of which equals 1 percent of the new loan amount), appraisal fees, application fees, document filing fees, and closing costs.

Your Refinancing Goal: Why do you want to refinance? Is it to get access to capital you can invest back into the business? If so, be realistic about how quickly you’ll get a return on the new investment you plan to make. If you don’t achieve your ROI as quickly as you planned, can you still afford your new monthly payment?

If the goal is to reduce your monthly payments, you’ll need to be realistic about whether you can get that interest rate you have your eye on. To get a prime rate, you need to have excellent credit, so it pays to know your credit scores and do what you can to boost them before refinancing. SBA-backed loans have some of the best interest rates, so be sure to check them out if your goal is monthly savings. What if your goal is to convert an adjustable-rate loan to a fixed-rate loan? In that case, know the rates and when your adjustable-rate loan will reset.

Refinance a Commercial Loan: Current Loan Factors

Current Loan Status: You should know your current loan’s terms inside and out, having scrutinized them before signing that first loan agreement (right?). Just in case though, be sure to review the terms and conditions of your current loan(s) now. Some things to consider: Is there a pre-payment penalty on the loan you’re looking to refinance? If so, you’ll need to factor that in when determining whether you’ll achieve cost savings. How much of the principal have you paid off? You’ll want to have equity in your business prior to refinancing, which will help you access to more favorable rates. On the other hand, if you’re well into paying off the principal, you may wish to keep that particular loan (and perhaps consolidate debt on others), since, once you get a new loan, you’ll start paying front-end interest all over again. It all depends on your commercial debt refinancing goals.

Your Current Lender: Is your current lender is a predatory one—that is, one who engages in lending practices such as charging inflated fees or exorbitant interest rates? If so, it’s probably wise to get out of the loan as soon as possible. Even if you take a short-term hit, you’ll likely be much better off with a transparent lender that follows responsible practices. Not sure if you’re being taken for a ride? Know your rights! Visit the Small Business Borrowers’ Bill of Rights, which was produced by the Responsible Business Lending Coalition.

Should I Refinance My Commercial Loan? The Bottom Line

Should I Refinance My Commercial Loan? In the majority of cases, it makes sense to refinance, but there’s no way to know for sure the answer to that question unless you’ve taken the time to carefully consider the above. Know your credit scores, know the market, do your homework, and do the math.
Whether you’re ready to refinance now, or you have more questions about the process and whether you’re ready, give us a call. We consider it our responsibility to help you become a more educated, savvy borrower. And when you’re ready to borrow, we have access to an extensive network of responsible lenders that offer a comprehensive range of financial products. Contact us about refinancing your commercial loan today.