Written by Refinancing your business loan is a relatively simple process. You essentially pay off your previous loan with a new one you’ve applied for, enabling you to take on its repayments instead. This is done by many business owners repaying small business loans if they’re not fully content with their current loan deal and are looking to move to another with more favourable terms, whether they be lower interest rates and fees or added features which may appeal to them.
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What are the benefits of refinancing business debt?
There are many reasons why a business might seek out a refinance from its existing loan deal. Some of the main motivating factors which may lead to a business owner seeking out a better business include:
Accessing lower rates and fees
Perhaps the most common and clear benefit of refinancing is to access a cheaper loan deal. Lenders strive to offer competitive and flexible products all the time, so it’s not uncommon to see one come along whilst you’re repaying your current loan debt. If your business’ financial situation and credit score have improved over the course of your loan repayments, you might be in a position to take advantage of a lower rate and more favourable terms than your current deal, particularly if your business was in its infancy at the time of your loan.
Consolidate existing debts
Many businesses will have a number of debts to juggle at any given time, which can range from other credit arrangements to expenses relating to the purchase of inventory to rent and utility bills. Because of this, it can often be a sensible option to consolidate multiple debts under one roof to make them more manageable. If some or all of these debts come with steep interest attached, it can also be highly beneficial to combine them into one payment at a lower rate on the same pay cycle.
Increasing your loan amount
You may be in the middle of repaying your business loan debt and suddenly require a boost to your available revenue. In cases like these, many owners will seek out a loan refinance to take advantage of the equity built up in their business over their time operating it. Equity is calculated by subtracting your business’ liabilities (outstanding debts) from the value of its assets, which will grow over time as you pay off your initial loans.
Extending your loan term
If expenses are beginning to mount on your business, or are simply looking to open up greater cashflow, you can refinance your current loan amount to be repaid over a longer term. Doing so will decrease your monthly repayments, giving you more breathing room to distribute your business’ available funds and ease some of the pressure brought on by the commitment of repaying your loan.
Removing a secured asset
Finally, if your home or another personal asset is currently being used as collateral for your loan and your business has since found itself in a position to borrow without it, you can switch from a secured to an unsecured loan. While there’s not even a remote risk of losing your asset if you’re able to keep on top of your repayments, you may have greater peace of mind if your property isn’t connected to your finance deal in any way.
However, a primary consideration when refinancing is the fees associated with paying out your initial loan early. This is more likely to affect you if you’re switching between lenders, but you should always be thorough in checking whether the fees you’d pay in the refinancing process partially or fully cancel out the benefit of refinancing in the first place.
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The business loan refinance process
Compare options in the market
Thoroughly compare your options with Savvy online before committing to the refinance. This is to make sure you’re able to access a better deal than the one you’re currently on. Once you’ve chosen your loan and lender, you can commence the application process.
Gather the required documents
If you’re refinancing with the same lender, you probably won’t need to resubmit the same documents. If you’re switching to a new lender, though, you’ll need to supply the following:
- Your driver’s licence or passport
- Your ABN/ACN and GST registration
- Your business bank details
- Records of your rent
- Business financials such as a business plan, tax returns, balance sheets, profit and loss
statements and your ATO ICA details (usually for larger loans beyond $250,000)
Submit your application
Once you’ve collected all the required documents, you can fill out your lender’s application form and send it off in a matter of minutes.
Receive an outcome
Your lender will let you know whether your application was successful a short time thereafter, with approvals available on the same day you apply. They’ll send through your final loan contract, which you can sign electronically and return.
Pay out your old loan and start your new one
Once your deal has been confirmed, you’ll receive your funds, which you can use to repay your previous lender (if you’re starting with a new one). However, some lenders may be able to pay your old lender directly, allowing you to begin your loan repayments without hassle within the month.
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Frequently asked questions about business loan refinance
There are several different fees which may be charged when pursuing a refinance. Some of these may include:
- Early exit fees for your current loan if applicable, which depend on the loan amount and how long is left to run
- A discharge or termination fee of up to $400 may be charged at the conclusion of your loan payments
- Establishment fee for your new loan, which could cost up to 3% of your loan amount
Similarly, the term you’re approved for will depend on how your lender assesses your application. Longer loan terms are generally reserved for safer businesses with a more stable and comfortable income. In general, though, business loan terms can vary from as little as three months up to five years in some cases. You can compare lenders with Savvy to find a deal offering your ideal term here.
It could – if your business loan is with the same institution which houses your other business banking products, such as transaction accounts, these may be affected if you switch to a different lender. This is especially the case if you were offered a bundle with your lender to carry all of your services over.
Yes – if you're currently paying off a low doc or no doc loan but in the intervening period have gathered the required documents for a standard loan application, you're free to do so. Refinancing to a full doc loan can help you save a considerable amount in interest and fees over the course of your repayments.
The limitations on borrowing don’t change when you refinance your loan. The amount you’re approved for will still be largely informed by your lender’s offered borrowing range, but also your business’ credit score, available revenue and the amount of equity built in your business. If you have a considerable amount of equity, or your revenue or credit score have increased over your loan term, you may find you’re eligible to borrow a greater sum than previously.
Yes – never count your chickens before they hatch. You should always wait until your loan approval is confirmed with a new lender before commencing the wrapping up process with your old one. They could find something in your profile which puts them off you or approve you for a smaller amount than required to cover your previous loan, so it’s best to wait for confirmation on your new loan first.
Yes – the interest portion of your loan repayments will continue to be tax-deductible after you switch loans and/or lenders. You may also be able to take advantage of benefits relating to factors such as depreciation and negative gearing, but this will differ between businesses.
