How to Refinance Business Debt (and When Not To)

Refinancing means taking out a new loan and using the proceeds to pay off one or more existing debts. In effect, you swap your old terms for new ones. When it is done well, the new terms fit the business better. When it is done in a hurry, it can simply move the problem down the road at a higher price.

Business owners usually refinance for one of three reasons:

• To lower the payment. Spreading the balance over a longer period reduces each installment.
• To consolidate. Replacing several loans or advances with one payment makes cash flow easier to manage.
• To change the schedule. Moving from daily or weekly debits to monthly payments can ease pressure on day-to-day cash.

A restaurant owner has taken a short-term advance. $30,000 remains to be repaid, over the next five months, which works out to $6,000 a month. The payments are straining cash flow.

She is offered a new $30,000 term loan at 14 percent over 24 months. The monthly payment is about $1,440, and she would repay around $34,569 in total, which is about $4,569 in interest.

Compare the two:

• Monthly payment: $6,000 falls to about $1,440, a relief of roughly $4,560 a month.
• Total still to repay: $30,000 rises to about $34,569.

Neither is automatically right. If the business is healthy and the squeeze is temporary, paying $4,569 more for breathing room may be worth it. If it is a way of postponing a deeper problem, the extra cost will not help. The key is to see both numbers before deciding. Test your own figures with our business loan calculator.

It tends to help when:

• You took expensive, short-term financing during a hard stretch and your profile has since improved
• You are managing several overlapping payments and want a single, predictable one
• Daily or weekly debits are causing overdrafts, and a monthly schedule would fit your revenue better
• Your credit or revenue has improved enough to qualify for noticeably better terms. See your business credit score for how profile affects pricing
• You are using an SBA 7(a) loan, which the SBA lists as an eligible use for refinancing current business debt, to move to a longer, more affordable structure. See SBA 7(a) vs. 504

Pause if:

• You would pay a prepayment penalty on the existing debt that wipes out the savings
• The existing product has a fixed payback, as with many factor-rate advances. Paying it off early may not reduce what you owe. See how to compare offers
• The total cost rises sharply and the only benefit is a lower payment you could address another way
• The underlying issue is profitability. Refinancing improves timing, not earnings
• The new loan adds a blanket lien or personal guarantee that the old one did not carry. See personal guarantees and UCC liens

1. List every debt you would replace: lender, balance, payment, frequency, remaining term and total still owed.
2. Request payoff letters with an exact payoff amount and any prepayment charges.
3. Get the new offer in writing: amount, rate or factor, fees, payment schedule and total repayment.
4. Compare total remaining cost on the old debt with total cost of the new loan, including fees.
5. Compare monthly cash flow before and after, using your slowest month, not your average.
6. Check your debt service coverage. Lenders will, and the ratio may improve even if total cost rises.
7. Confirm lien releases. Make sure the old lenders will terminate their filings once they are paid.

If the numbers still look right after these steps, you can proceed with confidence.

A refinance is easier to evaluate when someone else looks at the figures with you. A lendfloCapital advisor can review your current obligations, explain how lenders will view them and compare term loans, working capital and other options across our lender network. We are a broker, not a lender, and approval and terms depend on the lender and your profile.