Business Debt Refinancing: When and How to Replace High-Cost Loans

Many businesses accumulate expensive debt over time: merchant cash advances taken during emergencies, high-rate online loans when traditional financing was not available, or credit cards maxed during growth phases. Refinancing replaces this expensive debt with a lower-cost loan, reducing payments and total interest.

But refinancing only makes sense under certain conditions. Timing, costs, and your credit trajectory all matter. Here is how to evaluate whether refinancing is right for your business.

When Refinancing Makes Sense

Refinancing generates savings when the cost reduction exceeds the transaction costs. Consider refinancing when:

• Rate differential: You can get a rate at least 2-3% lower than your current weighted average
• Improved credit: Your credit score or business financials have improved since original borrowing
• Market changes: Interest rates have dropped significantly
• Debt consolidation: Combining multiple payments into one simplifies management
• Term extension: Spreading payments over a longer period improves cash flow
• Prepayment math works: Savings exceed any prepayment penalties on existing debt

Real Refinancing Example

A distribution company has accumulated debt from various sources:

The owner qualifies for an SBA 7(a) loan at 10% to refinance this debt:

Refinancing Options

SBA 7(a) Debt Refinancing

SBA loans can refinance business debt under specific conditions:

• Eligible debt: Must be business debt (not personal debt used for business)
• Benefit requirement: Refinancing must improve cash flow or reduce interest cost
• Rates: Prime + 2.25-4.75%
• Terms: Up to 10 years for debt consolidation
• Requirements: 680+ credit, 2+ years in business, strong cash flow

Bank Term Loans

Conventional bank loans can refinance without SBA requirements:

• Rates: 7-12% for well-qualified borrowers
• Terms: 3-7 years typical
• Advantage: Faster than SBA, no guarantee fees
• Disadvantage: Higher rates, shorter terms than SBA

Online Lenders

Online lenders offer consolidation loans with easier qualification:

• Rates: 15-40% APR
• Terms: 1-5 years
• Best for: Improving from very expensive debt (MCAs, high-factor loans)
• Caution: Still relatively expensive; aim for bank or SBA if possible

Calculating Refinancing Savings

Use this framework to evaluate refinancing opportunities:

• Step 1: Calculate current total cost (remaining interest on existing debt)
• Step 2: Calculate new loan total cost (interest + fees over full term)
• Step 3: Add prepayment penalties on existing debt if any
• Step 4: Savings = Current total cost - New total cost - Prepayment penalties
• Step 5: If savings positive, refinancing likely makes sense

When NOT to Refinance

Refinancing is not always the right move:

• Insufficient savings: If you save less than 2-3% after fees, may not be worth the hassle
• Near payoff: If existing debt will be paid off in 6 months, transaction costs may exceed savings
• Credit issues: If you cannot qualify for meaningfully better rates, wait until credit improves
• Using home equity: Refinancing business debt with home equity converts unsecured debt to secured; you risk losing your home
• Extending too long: Stretching $50,000 over 10 years to get lower payments may cost more total interest

The Refinancing Process

Here is what to expect when refinancing business debt:

• Get payoff quotes: Request payoff amounts from all existing lenders
• Shop new financing: Get quotes from 3-5 lenders (banks, SBA lenders, online)
• Calculate net benefit: Compare total costs including all fees
• Apply and provide documentation: Tax returns, financials, debt schedules
• Underwriting: Lender evaluates your full financial picture
• Closing: New loan funds; proceeds pay off existing debts
• Timeline: 2-8 weeks depending on lender type

Improving Your Refinancing Position

If you cannot qualify for good refinancing terms now, work on improvement:

• Pay down balances: Lower debt improves your debt-to-income ratio
• Build credit score: On-time payments on existing debt help
• Increase revenue: Higher revenue improves debt service coverage
• Clean up financials: Organized books make underwriting smoother
• Build banking relationships: A relationship banker may offer better terms

The Bottom Line

Refinancing expensive business debt can save significant money and improve cash flow. The key is ensuring the rate reduction and payment savings exceed the costs of refinancing, including any prepayment penalties.

SBA 7(a) loans often provide the best refinancing terms, with long terms and reasonable rates. But they require strong qualifications and take time to close. If you cannot qualify for SBA, bank loans or even quality online lenders can still improve your situation compared to merchant cash advances or predatory debt.

The best time to refinance is after your credit has improved but before you are desperate. Refinancing from a position of strength yields the best terms.