Small-business borrowers may feel that they have missed an opportunity to refinance at a lower rate of interest after the Federal Reserve raised its federal funding rate .
This is not always the case. You may still be able to get a lower interest rate, as the Federal Reserve has an impact on the rate of your business loan. A lower interest rate is not always a good thing, but it is a reason to refinance. These are some things to consider as you weigh your options.
Refinance a Business Loan
Secure a lower interest rate
The interest rate on your business loan can be affected by the type of loan, collateral, borrower qualifications, and years of business experience. For example, if you have been in business for a while, have a good credit rating, or have collateral that can be used to secure a loan for the past few years, you might be eligible for a lower interest rates.
Luis Ramos is director of business advice at Accion Opportunity Fund. He says that if someone is trying to get a lower rate of interest, it’s usually a good idea if their business has progressed. This is especially true if you were just starting your business when you received funding. Ramos states that a majority of people who take out their first loan have an interest rate that is much higher than those who have been in business for a long time.
Locking in an interest rate fixed
Federal Reserve indicated that future rate increases will be possible. Refinance to a fixed rate loan may offer stable monthly payments for borrowers with variable interest rates. Keep in mind, however, that fixed-rate interest rates are usually higher than variable rate loans’ initial rates. Not all lenders and loan types offer fixed-rate options.
Variable rates could be affected by increases in the federal funds rate. Ramos recommends that you consider the impact of a higher interest rate on your cash flow when refinancing from a variable-rate loan. Locking in a fixed rate loan is an option if you are unable to afford higher monthly payments.
Lower monthly loan payments
Your monthly loan payments can have a significant impact on your business’s operation. If you are concerned about cash flow, refinancing an existing loan can help to lower your monthly payments.
Frank LaMonaca is a mentor at SCORE (a non-profit organization and resource partner for the Small Business Administration), where cash flow is crucial. A reasonable interest rate on loans doesn’t make businesses fail. LaMonaca states that they fail because of a lack liquidity when things go wrong. Cash flow is the most important thing for small-business owners. He says that this is what allows them to survive every day, and even through any setbacks.
Avoiding a large balloon payment
Refinance can help borrowers who have a lump sum due at their loan’s end, also known as a balloon payment, avoid large cash outlays.
LaMonaca states, “If you find yourself in this situation, keep an eye out to see if there is an opportunity for you to get out of the balloon payments that make economic sense.” “My recommendation is to refinance that [loan] at the least one year before it matures .”
Refinance of a Business Loan
To ensure that you make the right financial decision, consider the cost of paying off an existing loan early and the benefits of a new loan. You will be able to repay your loan more easily if you choose a loan that doesn’t have prepayment penalties and other exit fees.
Fees are often added to the interest rate for business loans. SBA loans, for example, usually require guarantee fees. Loan fees are often added to the principal of the loan. These fees may not cause a significant increase in your monthly payment or total loan amount but they are worth considering when weighing the pros and disadvantages of refinancing.
Your financial situation
Refinances will go through the same underwriting process as any other business loan. Before applying for a loan, you can save time and possibly money by reviewing the loan requirements of the lender’s website. To determine your eligibility for a loan, you will need to review your personal and business credit, your debt-to-income ratios, accounts receivable, and annual income.
Small business owners can also contact nonprofits like SCORE for free counseling, or to talk to their local banker or accountant to discuss the benefits of refinancing an existing business loan.