You’ve probably been hearing the news that if you have a home mortgage, now is the time to refinance. But does the same advice apply if you’re a small business owner with other outstanding debts?
Here are four crucial considerations if you’re interested in the benefits of a refinance but need to weigh the decision carefully to assess if this really is the right move for you, right now.
1. Are there any additional fees?
Refinancing can be an excellent way to create extra room in your monthly operating budget if you’re feeling a financial pinch due to the COVID-19 pandemic. Statistics show that at the onset of the coronavirus pandemic the median firm with monthly expenses of $10,000 had only two weeks of cash stores available — which means many small business owners are still scrambling to find extra cash.
If you refinance your loan at a lower rate but keep the same term, your monthly payments will be smaller, which could free up necessary funds each month that can help you keep your business afloat.
However, it’s important to make sure you’re actually going to be saving money by doing this. There could be costly fees associated with refinancing that you haven’t accounted for. Be sure to look carefully into the rates and terms, checking especially for an early payment fee on your original loan or an origination fee on your new loan. For example, for some SBA 7(a) loans, borrowers could find themselves with a 1% to 5% penalty fee for paying back the loan within a certain timeframe.
2. Is your debt preventing you from buying necessary equipment?
In response to the COVID-19 pandemic, some companies have purchased new equipment to adhere to social distancing guidelines in order to reopen or remain open. One problem for some business owners, however, is they have so much existing debt that they are unable to find the extra funds in their operating budget to purchase new gear.
Some might consider an equipment loan, while others will opt to refinance old debt — getting a new loan that allows you to repay your old loans and have enough funds to purchase equipment. This could not only help you save money on your debt payments if you refinance at a lower interest rate, but it could also help you afford equipment that you desperately need.
Just remember to resist the temptation to over-borrow if you should choose this strategy. Even though you might qualify for a higher loan that could get you the best equipment, it’s smart to borrow just the minimum you need. If simpler or older equipment will suffice, go with that. Keeping your debt as low as possible will give you more options in the future.
3. How well do you know your lender?
It’s important to do your due diligence when vetting a potential lender. Not all lenders offer the same services or level of customer support, not to mention loan terms.
Since consumer protections for financial products don’t apply to business lending products, it might seem that there are few protections in place for business owners. To fill that gap, a Small Business Borrowers’ Bills of Rights is in development that aims to support business owners looking for financing. There are six points in this bill of rights, among them the right to transparent pricing and terms, the right to non-abusive products and the right to fair collections practices.
Ask your lender if they’re aware of this bill of rights and what processes they have in place to ensure they adhere to it. You might also want to look for reviews of your current lender from business owners with companies of approximately the same size in your area or industry. Some lenders have more experience working in certain industries, which could give them an advantage when it comes to understanding and meeting the specific needs of your company.
4. Is refinancing merely a Band-Aid?
While there’s no doubt that refinancing your business loan at a lower rate could help you save money in the long run, refinancing your loans alone won’t be enough to save your business if it’s in dire trouble.
You should not expect refinancing to be a miracle solution that will make it possible for your business to weather the downturn caused by the COVID-19 pandemic. In fact, 31.4% of business owners surveyed by the U.S. Census Bureau said they don’t expect their business to return to normal operations for six months or more. While refinancing your loans is a savvy strategy, it’s unlikely it can save you the amount of money you’ll need to survive six months or more of decreased revenues.
This is especially true if refinancing won’t move the needle, yet it will further impact your cash flow in the process. Do the math to see how much refinancing could actually save before getting too excited at the surplus of funds it might yield. Take a hard look at your business model and be creative about how you can tweak it to adjust to the current reality. Business agility combined with a savvy strategy such as refinancing could be a winning combination.