If you find yourself wishing that your current business loan had a lower interest rate or a longer term, or if you simply need more money to pursue further growth opportunities, refinancing your debt may be a good option.
Refinancing your current debt isn’t very complicated, but many business owners get hung up on where to start. You may not know the exact steps and routes to take, so here are the 3 most common ways that successful business owners refinance their debt.
- Small Initial Steps to Improve Your Business
This is a very important way to start the process of looking to refinance old debt.
Many business owners worry about getting a loan with better terms because the business’s details and financials might not have changed too much since applying for the previous loan.
However, if you have put the capital from the previous loan to good use, maybe by growing your inventory a little or launching a new marketing campaign, you are already moving in the right direction. One other key factor that lenders look for is payment history. They typically like to see 6-12 months of steady pay history because that tells them that you aren’t going to be consistently late or behind on payments. Making steady payments alone can help your case in the refinancing arena and could lead to better loan itself.
These small, but positive, changes in your business can actually lead you into a better loan term when you apply for refinancing. The new terms may not be substantially better, but they can have a big impact on your company.
For example, you may only be moving from a $30,000 loan to a $50,000 loan, dropping half of a percentage point on the interest rate, or extending the loan out a year. But, these small changes will add up in the long run and can help free up your cash flows from big loan payments or give you the added influx of capital you need to continue growing your business.
This kind of “simple” refinancing isn’t for everyone, and if you don’t need a second loan then you shouldn’t take one.
But if you’re looking to continue your business growth, refinancing into a slightly better loan will be beneficial.
- Bigger & Better Loans
On the other hand, some business owners are looking for a much more drastic change. This could occur for a number of different reasons, such as your business hitting a certain milestone since your last business loan or signing a big contract that requires a lot of resources to complete.
If you find your business in this scenario, you might very well qualify for an overhaul on your old loan for a much bigger and much better loan.
These larger and more affordable loans can have a huge impact on the way your business operates. With less frequent payments or a longer term, the larger sum of money will give you the ability to grow faster and bigger than before.
Here are just a few standard milestones that could indicate your business might qualify for much better financing:
- Reaching the 1, 2, 5, & 10 years in business. About 20% of businesses fail in the first year, 30% fail in the first two years, 50% fail in the first 5 years, and 66% fail in the first 10 years. These numbers are better than previously thought, as most of us have heard “50% of businesses fail in the first year” over and over again. However, with businesses dropping like flies as the years go on, reaching these important milestones bodes well for your company. The longer you are in business, the more confident lenders will be in your business as a proven concept, and the better their loan offers will be.
- Making $250,000 in annual revenue. First, a big milestone to hit is reaching the 6-figure mark. This is a good milestone to aim for when your business is young because it shows you are bringing in revenues and growing. However, when you’re looking into a big loan and you want the best rates, hitting $250,000 in revenues is the benchmark to aim for. The more money your business takes in, the more lenders will expect it to continue taking in. From a lender’s point of view, a proven & successful business is a better, less risky investment and will result in more money at a lower rate.
- Reaching a personal credit score of Your personal credit score is very closely tied to both how much a loan will cost and how much of a loan you qualify for. This is because your personal credit score indicates to lenders how risky you are to lend money to. Hitting a credit score of 700 shows that you aren’t as risky of a business owner and that you will be more likely to pay your debt obligations on a regular basis.
Of course, these aren’t set-in-stone rules. Hitting one of these benchmarks won’t necessarily qualify you for a better loan, but it can certainly help and won’t ever hurt your chances.
- Consolidation of Multiple Loans
Many people think of debt refinancing and debt consolidation as being synonymous, but they aren’t.
Debt consolidation is best described as a specific kind of debt refinancing.
Debt consolidation loans are loans that are used to essentially move a bunch of smaller loans into one large loan.
Say you’ve taken out several small loans over the course of a year or two to pay for various things. These multiple loans results in multiple monthly payments, which can be cumbersome and take a toll on your cash flows.
With a debt consolidation loan, you can roll these different loans into one large loan that will only have one weekly/monthly payment.
This type of refinancing structure can help your business in the same ways that normal debt-refinancing can. You will ultimately save money, have the opportunity to get more capital, and could have a longer term to pay off the debt. Additionally, you will have a one-stop-shop for paying off your loan. This makes the whole loan process much easier than having a handful of lenders and people to go to for each individual loan.