The Right Time To Refinance Your Small Business Debt – A Few Questions To Ask Yourself

Posted: 20th February 2015 09:46

During the credit crunch, there were many entrepreneurs who got the cold shoulder from their banks and it was then that they turned to some other high interest loan lending companies or to commercial credit card companies. However, now can be the best time to forget all the past financial worries and try getting a bank loan to refinance all your high interest debts, says the analysts and experts. The US Small Business Administration is now offering loans at less than 6% and is also waiving fees on loans under $150,000 and hence the small business firms could potentially save a lot.

Business development officer for SBA & USDA loans at Fidelity Bank in Dallas says that if the small business companies had to get back their expensive dollars, this is perhaps the best time to refinance as the rates are really too low. According to reports by the Office of the Comptroller of Currency, 25% of the big shot banks have made their credit underwriting standards lenient in 2014, bringing the percentage as close as the 2006 levels. 80% of the banks left the requirements for the small business borrowers unchanged. In fact, none of the 50 banks that were involved in lending to small business companies said they tightened their loan requirements.

In what way do you figure out that this is the time to refinance?
So, being a small business firm that is in need of debt consolidation loans, you must be wondering which is the right time to take out such loans. If that is the question in your mind, here are some questions that you can ask yourself before making the decision.

1.      Are the terms of your present loan competitive enough?
In such an environment, taking a close look at the interest rate of the loan is an obvious step that you should take. Generally, you are supposed to get the lowest interest rates from the banks and credit unions. For fixed-rate SBAthat are provided for working capital, the current rate that you’ll get is between 5.5 and 6%, depending on the maturity date of the loan. In case you’ve borrowed too much money on your commercial credit cards, by getting a bank loan, you can easily cut your overhead and use the proceeds to pay off the outstanding balances. Another option is the small business loans from peer-to-peer lenders. The average rate on small business loans of Lending Club offered rates at 13.39%, as per the 2014 study by the Federal Reserve Board.

2.      How much payments are left towards the interest rate of the current loan?
Are you nearing the end of an amortized loan where your payments are dominated by principal amount than the interest rate payments of the loan? If answered yes, then refinancing might not be the perfect solution for you. If you have already paid off a bank loan for the last 10 years and now you’re primarily paying the principal balance, this is not the time to refinance your debts. Even if you think that the interest rate is high, by the time you will successfully pay off the loan, it will be a sunk cost.

3.      Can you boast of a strong financial background?
Don’t even expect the banks to welcome you if either you or your business has poor credit records. However, if your credit score is already scarred, there is a program from SBA that can help you and that is called the SBA Advantage program. Through this program, they will use an alternative scoring system in order to evaluate your business and if they approve of you as a worthy borrower, SBA will surely guarantee the loan. So, before deciding to refinance, make sure you have a strong financial profile.

4.      What costs will you need to bear while taking out a new loan?
You should always remember that the ancillary costs and fees could easily wipe off any savings that you may get from refinancing your small business loan. So, all you need to do is the right calculations. Although you don’t have to pay fees on SBA loans of less than $150,000, larger loans will definitely cost more. For all the SBA loans that range from $150,000 to $700,000, fees are 3% and then for loans above $700,000, fees will increase to 3.5%.

5.      What kind of paperwork can you tolerate?
In order to take out an SBA guaranteed loan, you have to prepare lot of documents like 3 years of tax returns and one year of bank statements for you and your business. Do you have the patience to gather all such documents? Evaluate this before making the final decision.
Hence, if you’re not being able to pay off your current commercial loans, you can take into account the above mentioned questions and opt for a refinance loan.