When and How to Refinance Your Business Loan
Guide to refinancing business loans: when it makes sense, how to evaluate options, the refinancing process, and calculating whether refinancing saves money.
Refinancing replaces your existing loan with a new one, ideally with better terms. It can save you thousands in interest, lower monthly payments, or free up cash flow. But refinancing is not always the right move.
This guide helps you evaluate whether refinancing makes sense for your situation and how to do it right.
When Refinancing Makes Sense
Consider refinancing when:
- Your credit has improved: Higher credit score qualifies you for better rates
- Your business is stronger: More revenue, longer operating history
- Market rates have dropped: Interest rates are lower than when you borrowed
- You have expensive debt: MCAs or high-rate loans can often be refinanced cheaper
- You need to consolidate: Multiple loans into one simpler payment
- Your needs have changed: Need different term length or payment structure
When Refinancing Does Not Make Sense
Refinancing is not always beneficial:
- Prepayment penalties exceed savings: Math does not work out
- Your loan is almost paid off: Little interest left to save
- Credit or business has weakened: New terms may be worse
- Short-term need: Refinancing costs take time to recoup
- SBA to conventional: Usually moving backward on terms
Do the Math First
Refinancing has costs: origination fees, legal fees, and sometimes prepayment penalties on your old loan. Calculate total cost before proceeding.
How to Calculate Refinancing Savings
Use this framework to evaluate whether refinancing saves money:
- Step 1: Calculate remaining cost of current loan (remaining payments minus principal)
- Step 2: Add any prepayment penalty on current loan
- Step 3: Calculate total cost of new loan (all payments minus principal)
- Step 4: Add new loan origination fees and closing costs
- Step 5: Compare: Old loan total cost vs. new loan total cost
Example calculation:
| Item | Current Loan | New Loan |
|---|---|---|
| Remaining balance | $150,000 | $150,000 |
| Interest rate | 14% | 9% |
| Remaining term | 36 months | 48 months |
| Monthly payment | $5,127 | $3,730 |
| Total remaining payments | $184,572 | $179,040 |
| Prepayment penalty | $4,500 | N/A |
| Origination fee | N/A | $3,000 |
| Total cost | $189,072 | $182,040 |
| Net savings | $7,032 |
Consider Cash Flow Impact
Even if total interest is similar, lower monthly payments may be worth it for cash flow flexibility. Factor in the value of having more monthly cash available.
Types of Refinancing
Different refinancing strategies address different goals:
| Strategy | Goal | How It Works |
|---|---|---|
| Rate reduction | Lower interest cost | Replace with lower-rate loan, same term |
| Term extension | Lower monthly payment | Spread balance over longer period |
| Term reduction | Pay off faster | Shorter term, often higher monthly payment |
| Consolidation | Simplify payments | Combine multiple loans into one |
| Cash-out refinance | Access equity | New loan larger than payoff, pocket difference |
MCA Refinancing: A Special Case
Merchant cash advances are expensive and refinancing them often makes sense:
- Factor rates vs. APR: MCA factor rates (1.2-1.5x) translate to 50-150%+ APR
- Daily payments strain cash flow: Term loan with monthly payments helps
- Stacking risk: Multiple MCAs create debt spiral
MCA refinancing options:
- Term loan payoff: Use new term loan to pay off MCA balance
- SBA loan: If you qualify, best rates for MCA payoff
- Line of credit: Flexible option for paying down MCA
- Consolidation loan: Combine multiple MCAs into one manageable payment
MCA Payoff Can Be Tricky
Some MCAs have "reconciliation" terms that make payoff difficult. Review your MCA contract carefully. Some may not allow early payoff without paying the full factor amount.
SBA Loan Refinancing Rules
SBA loans have specific refinancing restrictions:
- Can refinance: Same-institution debt, debt with unreasonable terms, debt on inadequate collateral
- Cannot refinance: SBA loan with another SBA loan purely for better terms
- Waiting period: Some refinancing requires loan to be outstanding for specific period
- Business benefit: Must demonstrate clear benefit to business operations
Common SBA refinancing scenarios:
- MCA to SBA 7(a): Allowed if MCA terms are unreasonable (they usually are)
- High-rate term loan to SBA: Allowed if current terms burden the business
- Multiple debts to SBA 504: For real estate or equipment consolidation
The Refinancing Process
Refinancing follows a similar process to getting a new loan:
- Step 1: Gather your current loan documents (balances, terms, payoff amounts)
- Step 2: Check for prepayment penalties on existing loans
- Step 3: Get quotes from multiple lenders
- Step 4: Compare total costs (not just rates)
- Step 5: Apply with chosen lender
- Step 6: Go through underwriting process
- Step 7: Close new loan and pay off old loan
Documents Needed for Refinancing
Expect to provide:
- Current loan statements: Most recent statements showing balances
- Payoff letters: Official payoff amounts from current lenders
- Standard loan documents: Bank statements, tax returns, financials (see our documents guide)
- Use of funds: Explanation of refinancing goals
Prepayment Penalty Considerations
Prepayment penalties can kill refinancing savings:
| Loan Type | Typical Prepayment Penalty |
|---|---|
| MCA | None (but must pay full factor amount) |
| Online term loan | 0-5% of remaining balance |
| Bank term loan | 1-3% declining over time |
| SBA 7(a) | 3% first year, 2% second year, 0% after |
| SBA 504 | Prepayment prohibited first 10 years (with exceptions) |
| Equipment loan | Varies; often none after Year 1 |
Request exact prepayment figures from your current lender before committing to refinance.
Tips for Successful Refinancing
Maximize your refinancing outcome:
- Shop multiple lenders: Get at least 3 quotes
- Negotiate: Use competing offers to get better terms
- Time it right: Refinance when your numbers look good
- Avoid extending too much: Longer terms mean more total interest
- Consider total cost: Rate is not everything; fees matter
- Keep existing loan current: Late payments kill refinancing chances
Rate Lock Timing
If interest rates are volatile, ask about rate locks. Some lenders will lock your rate for 30-60 days while processing your application.
Red Flags When Refinancing
Watch for these warning signs:
- Higher total cost: Lower rate but longer term may cost more overall
- Excessive fees: Origination fees over 3% should be questioned
- Balloon payments: Manageable monthly payments followed by large final payment
- Variable rates: May be low now but could increase significantly
- Pressure tactics: Legitimate lenders do not rush you to close
Refinancing Checklist
Before refinancing:
- [ ] Know your current loan details (balance, rate, remaining payments)
- [ ] Get exact prepayment penalty amount
- [ ] Calculate total cost of current loan vs. new loan
- [ ] Get quotes from at least 3 lenders
- [ ] Compare total costs, not just rates
- [ ] Factor in your time and effort
- [ ] Review new loan terms carefully
- [ ] Confirm old loan will be paid off at closing
- [ ] Verify UCC termination after refinance
Ready to explore your options?
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
No Guarantee of Financing: Liminal Lending Co. is a business loan marketplace that connects borrowers with third-party lenders. We are not a lender and do not make credit decisions. Submitting an application does not guarantee approval or funding. Loan terms, rates, and availability vary by lender and are subject to borrower qualifications and lender criteria.
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Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
Information May Change: Financial markets, lending regulations, and economic conditions are subject to rapid change. While we strive to keep our content accurate and up-to-date, information in this article may become outdated. Always verify current rates, terms, program availability, and regulatory requirements with lenders and official sources before making financial decisions.