Key takeaways
- Refinancing a business loan involves taking out a new loan to pay off an old one and can provide opportunities for improved financial stability and growth.
- Reasons for refinancing business debt can include reducing the overall cost or monthly payment of the loan, changing the loan type or taking advantage of lower interest rates.
- Factors to consider when deciding when to refinance include market rates, personal and business credit scores and your company’s revenue and profitability.
When business finances become strained, refinancing is one way to minimize the financial burden. According to the 2024 Small Business Credit Survey, 27 percent of businesses seeking financing did so to refinance or pay down debt.
Business loan refinancing allows business owners to replace an existing loan with a new one. However, you want to make sure that refinancing works in your business’s favor. Ideally, the new loan would offer your business lower interest rates or longer repayment terms that effectively lower the monthly payments. That way you can more easily manage the payments or lower how much you’ll pay in interest over the course of the loan.
Learn when it makes sense to refinance, when it doesn’t and the steps to refinancing a business loan.
Why refinance a business loan
Refinancing a business loan means taking out a new loan and using that money to pay off the balance of an existing loan. You can refinance a business loan using your current lender or a new one.
Refinancing allows you to change your loan details, such as the interest rate, monthly payment and repayment term. The top reasons for refinancing a business loan include:
- Lower your interest rate. If you can refinance a business loan for a lower interest rate, it will typically help you save money on the loan in the long run. Lower rates mean less interest will accrue over the loan’s term.
- Get a longer repayment term. Another option is to extend the loan’s term. This lets you spread your repayment over a longer time period. But extending the term increases the long-term cost of the loan because you’ll be paying interest for a longer time.
- Change the type of business loan. Another reason to refinance is to change the type of business loan you have. For example, you could refinance a line of credit with a variable interest rate into a fixed-rate term loan. Changing the type of loan could lead to lower loan costs or terms that better meet your business’s funding needs.
When to refinance your business loan
In general, you should consider refinancing when it can help you save money or offer another benefit to your company, such as by lowering your monthly loan payments to improve cash flow.
Market interest rates have fallen
Interest rates on loans are influenced by a wide variety of factors, such as your company’s credit score and financial situation, but there is one major factor you have no control over.
Rates on all types of loans rise and fall in response to market forces. One major influencer over the rate market is the Federal Reserve’s federal funds rate. The Fed adjusts this rate, increasing it to fight inflation and lowering it when the economy slows.
When the Federal Funds Rate is high, loans tend to become more expensive. When it’s low, loans tend to get cheaper. This is especially true for interest rates pegged to the prime rate and Secured Overnight Financing Rate, which move in lockstep with the Fed’s rate adjustments. Many SBA loan rates, for example, are pegged to prime.
If you got your loan when market rates were high, and rates have since fallen, refinancing might help you save money.
Your personal or business credit scores have increased
Most lenders weigh credit scores and history heavily when determining loan interest rates. Your credit score helps lenders decide whether you and your business can be counted on to repay loans on time. A lower score translates to higher rates as lenders try to compensate for the risk of lending to you.
For business loans, both your personal and business credit scores can influence rates (though small business lenders more often consider your personal credit score). If you’ve boosted those scores since getting the loan, you might be able to refinance at a lower interest rate.
You’ve improved your business’s revenue or profitability
Lenders tend to care about one thing: Whether you’ll pay back the money that you borrow. Lenders compensate for risk by raising rates, so companies that look risky to lenders tend to pay higher interest rates.
If you got your loan when your company was not making a lot of money, your business probably looked like a big risk. If its financial situation has improved and you have the financial records — such as the balance in your business bank account and tax statements — to prove it, refinancing when you look like less of a risk can help you lower your loan’s interest rate.
You got your initial loan when your company was a startup
Another major risk factor in the eyes of lenders is the age of a company. New companies, especially those just a few months or a year old, are huge risks. The owners likely have limited experience, and the business doesn’t have a track record of making timely payments.
All that translates into more expensive loans.
If you got a term loan when your company was young, a few years of success can show that your company isn’t a risk and can lower your loan costs.
Banks typically have lower interest rates and higher time in business requirements than online lenders. If you recently passed the two-year threshold, try looking into refinancing with a bank.
When to hold off on refinancing business debt
Refinancing is a good idea in many situations, but there are times when it will cost you money and not bring many benefits.
Market rates have risen
If market rates have gone up since you got your loan, you might not be able to secure a new loan at a lower rate, even if your credit or business financials have improved. Refinancing will simply make your loan more costly.
Currently, loan rates have decreased dramatically across 2024, but rates for some loans have increased slightly in the first quarter of 2025, according to the Kansas City Federal Reserve. The Fed has been holding the federal funds rate steady for the past few months, but they are expected to cut rates in upcoming meetings, which will effectively lower rates offered by business lenders. In light of that information, you may want to wait until the Fed cuts rates before getting your new loan.
Your personal or business credit scores have dropped
If your company’s credit or your personal credit scores have dropped since you got your loan, you might struggle to qualify for similar interest rates. If the decrease in credit score is significant, you might not be able to qualify at all.
Your company’s revenue or profitability is stagnant or falling
If your business is getting less profitable or losing revenue, that’s a big red flag for lenders. You’ll have trouble refinancing at a good interest rate. Some lenders might require you to put up collateral or place a blanket lien on your business assets. Or they may simply refuse to approve your application. In this case, you’ll need to work to steady your business finances and improve revenue before applying for a new loan.
Pros and cons of refinancing a business loan
Pros
- You could qualify for lower interest rates. If your business finances or credit history have improved since you got your current loan, you could qualify for lower interest rates and more favorable terms with a new loan. These could save you money in interest over time.
- You could lower your monthly repayments. If you’re looking for more margin in your budget, you could look into refinancing for a longer term, which will lower your monthly payment. Doing so could put more capital back into your business that you can use for other needs.
- You could get more funding. Applying with stronger finances than you previously had could lead to the lender approving you for more funding. You can use the additional funding to expand your business, take advantage of a business opportunity or cover a necessary purchase.
Cons
- You may be charged additional fees. When taking out a new loan, the lender will probably charge you additional fees, such as an origination or administrative fee. In addition, your current loan may assess a prepayment penalty because you’re paying off the loan early. These fees will offset any savings you get from refinancing.
- Longer repayment terms could mean you pay more long term. While lowering your monthly repayment is attractive, you will end up paying more in interest if you extend your loan to a longer term. For example, you may have started with a five-year loan, but you’re looking to refinance for an additional five years. That additional time means you’ll end up paying interest for longer than the original loan. In general, try to get the shortest repayment term that is manageable for your business.
How to refinance a business loan
Refinancing a business loan can provide opportunities for improved financial stability and growth. Here’s a quick overview of the business loan refinancing process.
- Review your business loan details: Look at your existing loan, focusing on the type of loan, balance, interest rate, monthly payment and remaining payments.
- Determine your refinancing goals: There are a lot of reasons to refinance, but ask yourself how refinancing can help your business. If you had a startup business loan, refinancing could get you a lower interest rate or more affordable monthly payment. Lowering the loan costs could make it easier to manage your business loan.
- Confirm your eligibility: When refinancing, lenders will want to know your personal and business credit scores and the details about your business finances, such as annual revenue. Knowing this information can help you determine whether you will qualify with a specific lender. Lenders often post their minimum requirements for their business loans online, so you can look up their requirements before you apply.
- Gather your business paperwork: You’ll be required to submit business documentation when applying for refinancing, including bank statements, tax returns, business licenses and proof of collateral if you have a secured loan.
- Shop around and compare loan options: It’s wise to shop around and compare lenders, especially comparing the available loan amounts, interest rates, terms, fees and collateral requirements. If possible, prequalify with lenders, which allows you to see the terms of the loan without a hard check on your credit.
- Submit your application: Once you choose a lender, you can submit your application along with any required documentation.
As you review lenders, ask yourself the following questions to help you narrow down your options.
Should I consolidate my loans?
If you have multiple loans for your business, weigh the pros and cons of consolidating your loans instead of refinancing them individually.
Consolidating business debt means getting one new loan and using the money to pay off multiple existing loans. You trade several loans and their corresponding monthly payments for one loan and one payment that’s easier to manage.
When consolidating, you have to consider whether doing so will benefit your business.
The major advantage is the simplicity of only applying for one new loan and only managing a single loan going forward.
But remember that your existing loans likely all have different terms. If you consolidate, that might lengthen the terms of some loans and shorten the terms of others. That makes the math on whether you save money overall more complicated. You can use a business loan calculator to compare the results.
Business loan refinancing vs. debt consolidation
When choosing between business loan refinancing and debt consolidation, the decision depends on your specific goals for managing your debts.
Generally, debt consolidation is a good option if your main goal is to manage your debt better and only have one monthly payment.
However, refinancing each loan individually might help you save more money overall by lowering the interest rates, which will likely lower your monthly payment. But, with refinancing, you’ll still need to manage each loan payment separately.
Types of business loans eligible for refinancing
You can refinance nearly any business loan as long as the new loan doesn’t strictly prohibit using it to pay off existing debts. Loans you may consider getting to refinance your current loan include:
| Type of business loan | How it works |
| Business term loan | This type of loan gives you a lump sum that you can use for nearly any purpose that you state in the loan agreement. You repay the loan in fixed repayments with interest over an agreed-upon amount of time. |
| Business line of credit | This type of loan works like a business credit card, allowing you to borrow up to the credit limit. You only pay interest on the amount you withdraw, and you can reuse the credit again in the future as you pay back the loan. |
| Equipment loan | This loan offers funding specifically to purchase a piece of business equipment, from semi trucks to machinery to office equipment. You then use the equipment as collateral for the loan. Because it’s secured with assets, this loan tends to come with lower interest rates than other business loans. |
| Microloans | This loan comes in small loan amounts such as $50,000 to $100,000, helping you get funding to cover small purchases. Microlenders tend to relax eligibility requirements, including accepting startups and bad credit borrowers. |
| Invoice financing | This type of loan allows you to use your unpaid invoices to secure a loan from a financing company. The company pays you 70 percent to 90 percent of the invoice amount. If you choose invoice factoring, the company will also collect the invoices for you. Then, the company takes out its fees once your customers pay the invoices. Because fees can be high, you may only want to use this alternative financing if you can’t qualify for other loans. |
| Merchant cash advance | Merchant cash advances give you a lump sum based on your credit and debit card sales. You then repay the advance using a percentage of your future sales. Not technically a business loan, this type of financing is known for high approval rates, so you may get approved even if you’ve been turned down by other lenders. However, be aware that interest and fees can be extreme, reaching 100 percent or more in some cases. |
Bottom line
Deciding when it’s best to refinance your business loan involves research and evaluating multiple factors. You want to decide the main goal of your refinance, whether it’s to lower your monthly payments or lower the amount of interest you’re paying. Then, consider whether your business will be eligible for lower interest or longer terms based on your current financials, credit history and business profitability. Ultimately, if it’s the right time, refinancing could potentially secure a stronger financial future for your business.
Frequently asked questions
Why we ask for feedback
Your feedback helps us improve our content and services. It takes less than a minute to
complete.
Your responses are anonymous and will only be used for improving our website.
Help us improve our content
Read the full article here
