Refinancing is the process of taking out a new mortgage or home loan with a different lender while simultaneously paying off your existing mortgage. Refinancing can come in handy in many situations, but perhaps the most common reason people refinance is to get a lower interest rate and monthly payment. Reducing your interest rate and monthly payments can help you save money over the long term, which is why so many people choose to refinance their home loans. But refinancing your mortgage isn’t just about saving money – it’s also a strategic business tool that can help you achieve specific financial goals. Here are five ways you can use refinancing as a strategic business tool.
Consolidate your debts
If you have multiple debts, refinancing your mortgage can help you pay off those debts faster. You can do this by putting a larger amount of money towards your mortgage each month, which allows you to pay off your other debts more quickly. A side benefit of this approach is that you also reduce your monthly interest payments.
Grow your business with a business loan
If you own a small business, refinancing can give you access to additional capital that you can use to grow your business. A business loan, often called a commercial mortgage, can be a great option if you’re trying to finance a big investment, like a new piece of equipment. However, traditional lenders often require you to have a very high credit score and lots of collateral to get approved for a business loan. If you refinanced your mortgage, you could use the new loan to secure a lower interest rate and monthly payment. This would give your business more financial stability and allow you to pursue more ambitious growth strategies.
Pay off a high-interest loan
If you have a high-interest loan, like an auto loan or student loan, refinancing your mortgage could allow you to pay off that loan early and save money in the process. If you have a big enough loan payment every month, you could even use your lower mortgage payment to pay off your high-interest loan early. This would reduce the amount you’d have to pay over the long term and could help you save money and keep your credit score high.
Increase your cashflow
If you’re looking to increase your cash flow, refinancing your mortgage may be a good option. If you have a 30-year mortgage, paying off your mortgage early could give you access to a large sum of cash – with no penalty for early repayment. This extra cash could be a useful source of capital for your business and allow you to pursue ambitious growth strategies.
Reassure your lender with a reliable income stream
If you’re applying for a loan and your lender is concerned about your ability to repay the loan, refinancing your mortgage could help them feel more confident about your application. You can do this by adding an income stream to your household income, like an annuity or rental income. Having a positive cash flow could help your lender feel more comfortable with the risk of lending to you.
Types of Business Loans You Can Refinance
Below are some of the business loans you may be able to refinance with a new loan.
Business term loans
Terms loans are a traditional form of financing that’s repaid over a set period of time—typically up to 10 years. These loans can fund most large business-related purchases.
Business lines of credit
A line of credit is a set amount of money that a business owner can use as they need, compared to receiving a lump-sum payment upon approval.
Working capital loans
Working capital loans help businesses pay for day-to-day operations, such as payroll, making debt payments, restocking inventory, and staying current on rent.
Short term business loans
A short-term business loan lets businesses access to cash to cover things like short-term payroll needs, emergency expenses or other unexpected cash flow shortages.
Business owners looking to finance business-related equipment can turn to equipment loans for necessary funds.
Commercial real estate (CRE) loans.
CRE loans help businesses buy commercial property, such as retail malls, shopping centers, office buildings, and hotels.
Tips for Refinancing Your Business Loans
When you approach the process the right way, refinancing business loans can be a wise financial decision. The following tips should help you make sure a new refinance can benefit your business.
1. Crunch the Numbers
It’s important to gather multiple refinance offers before you submit your new loan application. But you need to compare the right loan details to make sure you find the best deal for your company.
Consider using a business loan calculator to compare multiple refinance loan offers.
2. Look for Penalties
Your existing loan might feature a prepayment penalty. If this is the case, refinancing might not be beneficial. Any potential interest savings could be offset by the cost of your prepayment penalty. Be sure to factor this potential cost into your savings calculations if this situation applies to you.
3. Be Careful About Debt Creep
Taking out a more affordable loan to refinance existing debt can save you money and help you pay off debt faster. Yet you might be tempted to run up more business debt if you’re not careful.
For example, if you take out a low-rate business loan to pay off your business credit cards, you’ll unlock that previously unavailable credit limit again. But if you run up new balances on those same credit cards, you might have trouble keeping up with all of your debt payments in the future
What does refinancing in business mean?
Corporate refinancing is the process through which a company reorganizes its financial obligations by replacing or restructuring existing debts. Corporate refinancing is often done to improve a company’s financial position. Through refinancing, a company can receive more favorable interest rates, improve theircredit quality , and secure more favorable financing options. It can also be done while a company is in distress with the help of debt restructuring.
What is a refinancing transaction
Refinancing Transactions means the payment in full of all amounts due or outstanding under the Existing Credit Facilities, the termination of all commitments thereunder and the release and discharge of all guarantees thereof and security therefor.
Pros and Cons of Refinancing a Business Loan
Consider the following benefits and drawbacks to determine whether refinancing your business loan is a wise choice.
- Save money: You might be able to lower your monthly payments and pay less interest overall when you refinance.
- Improve cash flow: Finding a new loan that lowers your monthly payment amount could reduce the stress on your company’s cash flow.
- Build business credit: If your new lender reports to the business credit bureaus, refinancing might give you the opportunity to establish good payment history on your business credit reports.
- Potential qualification hurdles: If you have bad credit or other qualification hurdles, you might not qualify for a refinance loan. Even if you can find a lender to approve you, the new loan offer may not be competitive enough to save you money.
- Possible penalties: If your original loan terms feature prepayment penalties, those fees can offset your potential savings.
- Higher overall cost: You might be motivated to refinance your business loan to set up more affordable monthly payments. Yet if you extend your loan terms to accomplish this goal, you may wind up paying more in interest in the long run.