If forced to choose a favorite, we would have to say "refinancing" is one of our favorite financial prefixes. This niche strategy can leave you feeling less dragged down by debt and pave the way towards financial freedom. However, with no exact formula encompassing every input of commercial loan refinancing, it is difficult to decide when and if a refinance is the right move for you and your business.
Luckily, we've put together a guide outlining what to be on the lookout for and when it might be time to talk to a lender about refinancing your commercial loan.
Commercial Loan Refinancing at a Glance
When the terms of the commercial loan you've taken out for business expenses are no longer favorable, it may be time to refinance. To sum it up, refinancing a commercial loan means replacing the original business loan with a new one, usually to save money down the road. While this tactic is most often seen used for commercial properties, it can be used for any commercial loan covering costs associated with small business acquisitions, operations, equipment, or real estate.
When and Why to Refinance?
There is a time and place when refinancing your commercial loan is in your best interest — pun and foreshadowing intended.
More Favorable Loan Terms
Unlike personal loans and residential mortgages that typically amortize over 30 years at set interest rates, commercial loan terms are decided by your business or property performance at the time you were taking on debt. So, if your credentials — revenue, credit score, business history, etc. — have improved, then it might be time to refinance for more favorable loan terms. Whether that be smaller payments, less frequent payments, locking in a lower interest rate, or pushing off the final commercial loan balloon payment, refinancing helps you do that.
Extra Cash on Hand
Refinancing a commercial loan allows you to obtain extra tax-free cash that can be used for any purpose, personal or professional. For example, you can tap into the equity of your commercial real estate to fund a trip to Europe. That difference in the existing and new loan amount is where the excess cash comes in.
Invest in Property Improvements
Often used as a real estate exit strategy, commercial loan refinancing provides funds that can be invested back into your commercial property. This is common for real estate investors who are looking to eliminate tenant turnover and implement rent increases with better property amenities, or are taking on a costly repair like a new roof or water heater. In this case, refinancing a commercial loan for your property will bring in more cash flow in the long run.
Consolidate Multiple Sources of Debt
A common sign that it might be time to refinance is if you have multiple sources of debt that are complicating your business and personal finances. Debt consolidation means taking out one loan to merge and pay off all of your pre-existing debt. While it does not always save your business money, it streamlines your business's finances and saves you the headache of trying to balance it all.
When and Why Not to Refinance?
Though you may be asking yourself at this point, "Why wouldn't I refinance?", there is a time and place where commercial loan refinancing is a hindrance instead of a help.
Sometimes improving your credentials just isn't enough. If you have a tax lien, have declared bankruptcy, or are running a business that is just not performing at its best, then you would not be eligible to refinance your pre-existing debt with a new loan. It will take time, but building your business and personal credit, increasing revenue, and just being in business longer will help you become eligible for refinancing a commercial loan in the future.
Doesn't Save Money
Depending on the lender, it is common for loans to have prepayment penalties in place to cover interest accrual lost if the loan is payed off early. If that is the case, the savings or convenience that comes with refinancing a commercial loan isn't worth the cost of the prepayment penalty attached to your previous debt.
Other factors to consider before deciding to refinance:
- How the commercial loan refinance will affect monthly cash flow.
- What the closing costs will be and how much will have to come out of pocket?
- If coming out of pocket, how long it will it take for the savings to “pay back” the closing costs?
- What the amortization schedule (a.k.a. repayment timeline) will be, compared to existing loan.
Commercial loan refinancing is not a one size fits all. Find out if now is the right time for you and what your refinancing options are with one of our experienced lenders today.