Refinancing business debt with a term loan can be a smart way to consolidate multiple payments, lower your monthly obligations, or simplify your financial life. But is it the right move for your company? Below, we’ll walk through exactly what refinancing means, the pros and cons of using a term loan for this purpose, and the practical steps you should take to evaluate whether it fits your needs.
Key Takeaways
- A term loan can help streamline multiple business debts into a predictable repayment plan.
- Eligibility for refinancing depends on your business’s financial strength and credit history.
- Refinancing with a term loan may lower payments or improve cash flow but comes with trade-offs.
What Does It Mean to Refinance Business Debt?
Refinancing business debt means using a new loan—often with different terms—to pay off some or all of your existing business debts. The goal is typically to consolidate several payments into one, reduce your interest expense, or give your business more breathing room through a different payment schedule.
Common Business Debts That Get Refinanced
- Lines of credit: Flexible financing but often with high interest rates if balances are carried.
- Merchant cash advances: Short-term, high-cost funding repaid through a percentage of daily sales.
- Equipment loans: Used to finance business machinery or vehicles; may offer better rates as collateralized debt.
- Business credit cards: Remodel high-interest revolving debt into a structured loan.
- Other short-term loans: Including bridge loans or working capital advances.
Why Business Owners Consider Refinancing
- Lower monthly payments: Spreading repayment over a longer period can free up cash flow.
- Securing lower interest rates: If your business has improved financially, you may qualify for better rates (source: Federal Reserve, 2023).
- Simplifying finances: Multiple debt payments are consolidated into just one.
- Changing loan structure: Shifting from variable to fixed rate, or adjusting payment terms for predictability.
How Term Loans Work for Debt Refinancing
A term loan is a lump sum loan repaid over a fixed period, often ranging from 1 to 5 years. The interest rate may be fixed or variable, and payments are typically made monthly.
Repayment Structure and Key Features
- Loan amount and repayment term are set at closing.
- Interest rates commonly range from around 6% to 36% APR, depending on qualifications and market conditions (source: U.S. Small Business Administration), subject to approval and may vary.
- Payments are predictable, helping you plan cash flow.
Definition: A business term loan is structured financing with a set payback period and regular installments, and may be used to refinance existing business debts.
Comparison Table: Refinancing Options
| Type of Refinancing | Repayment Structure | Rate Range (subject to approval) | Best For |
|---|---|---|---|
| Business Term Loan | Fixed payments over set period (1-5 years typical) | 6%–36% APR (varies) | Predictability, debt consolidation |
| Business Line of Credit | Flexible draw and repay cycle | 8%–24% APR (varies) | Varied, ongoing needs |
| Merchant Cash Advance Refinancing | Daily/weekly payments, often with a factor rate | 1.1–1.5 factor rate (implied APR much higher) | Short-term needs, rapid repayment |
Pros and Cons of Using a Term Loan to Refinance Business Debt
Potential Benefits
- Simplified payments: One regular payment instead of juggling several.
- Possible savings on interest: If your new loan has a lower rate or better terms, you may pay less over time (subject to approval).
- Improved cash flow: Spreading payments over a longer term can lower your monthly obligations—helpful if you’re managing tight business finances.
Key Drawbacks to Consider
- Fees: Many lenders charge origination, application, or closing fees when setting up a term loan.
- Total interest over time: A lower monthly payment often means a longer repayment period, which can increase the total interest you pay.
- Possible collateral requirements: Some term loans require business or personal assets to secure the loan.
Example Scenarios
- When refinancing helps: You have several short-term debts at high interest rates and qualify for a lower-rate term loan, reducing your overall payments and simplifying your obligations.
- When refinancing isn’t ideal: The new loan’s fees and longer term would result in paying more interest than continuing to pay off your current debts.
Eligibility Criteria: What Lenders Look For
Lender requirements vary, but these are the most common factors:
- Credit score: Both your personal and business credit histories are considered. Many lenders look for scores above 650, though some work with lower.
- Time in business: Typically, two years or more. Startups may find options more limited.
- Revenue: Minimum annual revenue requirements can range from $100,000 up, depending on the lender.
- Debt service coverage ratio (DSCR): This measures your cash flow available to pay current debt. A DSCR above 1.25 is preferred by many lenders. (DSCR = net operating income / total debt service)
Documentation Commonly Required
- Business tax returns (typically last two years)
- Personal tax returns for owners
- Financial statements (profit and loss, balance sheet)
- Debt schedule of existing business loans
- Business formation documents and photo ID
How Eligibility Differs Among Lenders
Conventional banks generally require stronger credit and more financial documentation than alternative or online lenders. Online platforms and funding solutions providers may help you access a broader range of options if you don’t meet the strictest criteria.
Step-by-Step Process to Refinance with a Term Loan
- Evaluate your current debts: List your outstanding balances, interest rates, and monthly payments. Calculate if refinancing would reduce your total cost and improve cash flow.
- Research and compare term loan offers: Look at interest rates, terms, fees, and repayment options from multiple sources. Remember, rates and approval are subject to review and qualification.
- Gather financial documentation: Prepare tax returns, financial statements, and a list of debts. This will streamline your application.
- Apply and review loan documents: Submit your application; carefully review all disclosure documents, paying close attention to repayment terms, fees, and any covenants (conditions you must meet while the loan is outstanding).
- Repay original debts: Once the term loan funds are received, use the proceeds to pay off your existing business debts as agreed.
Key Considerations and Common Pitfalls
Calculating Total Repayment Costs
Don’t focus only on the monthly payment. Use a loan cost calculator or worksheet to estimate your total repayment, including interest and all fees. The Consumer Financial Protection Bureau offers educational tools to help.
Identifying Fees
- Origination fees: Charged upfront by some lenders for processing your loan.
- Prepayment penalties: Fees for paying off your loan early; make sure you understand these before committing.
- Closing costs: Additional charges for legal, documentation, or administrative services.
Reviewing Loan Covenants and Terms
Some term loans come with requirements about how you run your business (like maintaining certain financial ratios or not taking on additional debt). These covenants can impact your daily operations and should be reviewed closely.
Impact on Credit and Future Borrowing
Refinancing typically results in a hard inquiry on your credit report. If you manage the new loan well, it may improve your business’s credit profile over time. Be aware, though, that increased debt or missed payments can negatively impact your future borrowing options.
Resources and Next Steps for Small-Business Owners
Where to Compare Offers
- Traditional banks and credit unions
- Online lending platforms
- Business funding solution providers and brokers
Why Consider a Business Funding Solutions Provider?
These professionals may help you access a wider range of loan types and structures—even if you don’t qualify for conventional bank loans. They can also help you evaluate loan offers beyond headline interest rates, including terms and fees. Note that such providers are not direct lenders; they work with a network of lending partners.
Suggested Questions to Ask Before Refinancing
- Will the new payment schedule free up enough cash flow to justify the cost?
- What are all the fees and total interest costs involved?
- Are there prepayment penalties or restrictions on paying off the new loan early?
- How will this affect my business and personal credit scores?
- What happens if I miss a payment under the new loan?
Careful comparison and planning are key when you refinance business debt with a term loan. By evaluating your current debts, comparing offers, and understanding the true costs and implications of a new loan, you’ll be in a stronger position to make the best financial decision for your business’s future.
Frequently Asked Questions
What types of business debts can I refinance with a term loan?
You can typically refinance a range of business debts with a term loan, including lines of credit, merchant cash advances, equipment loans, business credit cards, and other short- or medium-term loans. The key is that the new lender must agree to pay off these debts as part of the loan proceeds. Always confirm with the term loan provider which debts they allow to be refinanced.
How does refinancing with a term loan affect my credit?
Refinancing with a term loan can temporarily lower your credit score due to a hard inquiry during the application process. If you manage the new loan responsibly—making payments on time and reducing total outstanding debt—it can improve your business and personal credit over time. However, missing payments or accumulating too much debt may negatively impact your credit profile.
What documents do I need to apply for business debt refinancing?
Most lenders will ask for recent business and personal tax returns, financial statements like profit and loss statements and balance sheets, a list of your current debts (debt schedule), business organization documents, and the government-issued IDs of business owners. Different lenders may have additional or specific requirements.
Are there fees when refinancing business debt with a term loan?
Yes, there are often fees associated with refinancing business debt, such as loan origination fees, application fees, closing costs, and sometimes prepayment penalties. Fees can vary significantly between lenders, so it’s important to understand and compare the total cost before accepting any term loan offer.
How long does it take to refinance business debt with a term loan?
The time frame to refinance can vary by lender. With banks, the process may take several weeks due to more extensive review and documentation. Some online lenders and business funding solution providers may help you access financing in as little as a few business days, though timelines depend on your preparedness and the complexity of your financials.
Can I refinance merchant cash advances with a term loan?
In many cases, yes—a term loan may be used to pay off existing merchant cash advances, especially if you qualify for better loan terms. This can help replace high-frequency, daily payments with a single, predictable monthly payment structure. However, each lender’s policy differs on what types of obligations can be repaid, so confirm eligibility in advance.
This article is for informational purposes only and is not financial, legal, or tax advice. Funding products, rates, and terms vary and are subject to approval. Capital Gurus is headquartered in Las Vegas, Nevada.