It is very common for small business owners to take out small business loans to raise the capital they need to cover all of their start-up costs. From paying for rents at their commercial building to investing in marketing materials, there are several start-up costs that the average entrepreneur cannot cover without help. But when you started your business, there is a chance that you were forced to take out a high-interest loan because of the risk associated with lending you money. In the world of commercial finance, the more risky you are as a borrower, the higher the interest you will pay. Find out whether or not you should consider refinancing your small business loan and learn what factors you should consider by reading on.
Bringing Down Your Monthly Loan Payment with a Lower Interest Rate
One of the key disadvantages of taking out a small business loan to finance the start-up of your company is that you are committing to pay interest for the money. The interest you are paying adds up and becomes business debt. When you take out a high-interest loan, you are literally watching your debt pile up as you struggle to win over customers and fight your competitors who are already established in the industry. Now that you have some experience in the industry, the idea of reducing your monthly payments by refinancing your small business loan is very appealing.
Commercial interest rates have gone down significantly since the economic recession. In an effort to encourage small businesses to borrow, lenders are offering very low interest rates to borrowers who have good credit and equity in their business. While you may not have qualified for these loans when you opened your doors, now that you have been operating for a year or more it may be the right time to apply for a refinance loan. Lowering your interest by just one or two percent can reduce the amount of interest you pay throughout the life of the loan by thousands of dollars. This is money that you can use to reinvest into your business instead of paying it to a lender.
What You Should Know Before You Try Refinancing Your Loan
Not all small business owners will qualify to refinance their current commercial loans at a lower interest rate. Unlike some other types of loans, business loans are relationship-based. This means that when the bank knows the borrower and knows that the owner is able to run his business profitably, they are more likely to approve a refinance. Here are several factors that banks will consider before approving any commercial loan:
* Have you paid all of your prior payments on-time?
* Is your annual net cash flow at least two times what you will owe on your loan>
* Do you have equity in your business?
* Will the refinance benefit your business and reduce your debt?
It is important to remember that not all business owners will qualify for refinancing of their commercial loans. If you do not qualify for a refinance, it is important that you have a back-up plan, so that you can pay off your high interest loan or reduce the debt until you qualify for a refinance. Compare the products available through several different lenders, compare the rates, and ask your banker if you are making the right decision. Lower your monthly payments, put more money into your business, and expand your business as you have always dreamed of doing.
Bio: This article was written by Ty Whitworth for the team at kendall.edu; for those wishing to start a small business, consider their undergraduate business school degree programs.