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Business loan refinancing means replacing your existing loan with a new one that has better terms, a lower interest rate, or a more manageable repayment structure.
The goal is usually to reduce your monthly payments, lower your total cost of borrowing, or both.
Refinancing works the same way it does with a mortgage: you take out a new loan, pay off the old one, and start repaying the new one under (hopefully) better conditions.
Why So Many Businesses Are Carrying Expensive Debt
A lot of small business owners took on debt in the last few years under conditions that weren't exactly ideal. Some borrowed during the pandemic when options were limited. Others grabbed fast funding from online lenders because they needed capital quickly and didn't have time to shop around. Some took merchant cash advances to cover emergencies and are still paying them off months or years later.
The numbers tell the story. According to the Federal Reserve's Small Business Credit Survey, 39% of small businesses carry more than $100,000 in outstanding debt, a figure that remains above prepandemic levels. And among businesses that applied for new financing, 24% said their goal was specifically to refinance or pay down existing debt.
If that sounds like your situation, you're not alone. And if you're paying a higher rate than you should be, refinancing might be one of the smartest financial moves you can make right now.
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When Refinancing Makes Sense
Not every loan is worth refinancing. There are costs involved, and sometimes the math just doesn't work out. But there are a few situations where it almost always makes sense to at least look into it.
Your credit has improved since you originally borrowed. If you took out a loan with a 580 credit score and you're now sitting at 700, you're a very different borrower in the eyes of a lender. That improvement alone could qualify you for a significantly lower rate.
You took on high-cost debt in an emergency. Merchant cash advances and some short-term loans carry effective APRs that can reach 40%, 60%, or even higher. If you took one of those to get through a tough patch and your business is now stable, replacing that debt with a long-term loan at 10% to 15% could save you thousands.
Your business revenue has grown substantially. Lenders price loans based on risk. If your business was doing $10,000 a month when you first borrowed and now you're at $40,000, your risk profile has changed completely. You may qualify for products and rates that weren't available to you before.
You're juggling multiple loans. If you're making three or four different loan payments to different lenders every month, consolidating those into a single loan can simplify your finances and potentially reduce your total monthly payment. It also makes it easier to manage cash flow when you only have one due date to think about.
Interest rates have dropped. If market rates are lower now than when you originally borrowed, refinancing lets you take advantage of that shift. Even a few percentage points can add up to real money over the life of a loan.
When Refinancing Doesn't Make Sense
There are times when refinancing sounds appealing but actually costs you more in the long run.
If your current loan has prepayment penalties, you need to factor those into the math. Some lenders charge a fee if you pay off the balance early, and that fee can eat into the savings you'd get from a lower rate. Check your existing loan terms carefully, or read up on how prepayment penalties work before you commit.
If you're close to paying off your existing loan, refinancing might extend your debt timeline unnecessarily. Saving $200 a month sounds great until you realize you've added two years of payments.
And if your financial situation hasn't actually improved since you first borrowed, you might not qualify for better terms anyway. Refinancing into the same rate with added origination fees is a step backward, not forward.
How the Refinancing Process Works
It's not that different from applying for a new loan, because that's essentially what you're doing. Here's what it typically looks like:
Step 1: Know what you currently owe. Pull together your existing loan details: the outstanding balance, the interest rate, the monthly payment, remaining term, and any prepayment penalties. You need to understand the full picture before you can evaluate whether a new loan is actually better.
Step 2: Check your qualifications. Look at your current credit score, your monthly revenue, and your time in business. If these have improved since your last loan, you're in a good position. Lenders like BusinessCapital.com work with businesses that have at least six months of operating history and $15,000 in monthly revenue, with credit scores starting at 500.
Step 3: Shop around. Don't just go back to your current lender. Compare offers from banks, SBA lenders, online lenders, and alternative funding companies. Look at the total cost of borrowing, not just the interest rate. Factor in origination fees, closing costs, and how long you'll be in debt.
Step 4: Calculate the actual savings. Take the total cost of your current loan (remaining payments plus any fees) and compare it to the total cost of the new loan (all payments plus origination fees and any prepayment penalties on the old loan). If the new loan saves you money after accounting for everything, it's worth doing. If it's a wash or close to it, probably not.
Step 5: Apply and close. Once you've found the right offer, submit your application with the usual documentation: bank statements, tax returns, profit and loss statements, and your existing loan details. When the new loan is approved, the new lender typically pays off your old loan directly, and you start making payments on the new one.
What You Can Refinance
Pretty much any type of business debt is eligible for refinancing, though some products are more commonly refinanced than others.
| Debt Type | Common Refinancing Option |
|---|---|
|
Merchant cash advances |
Term loan or line of credit |
|
High-interest short-term loans |
Long-term loan or SBA loan |
|
Multiple small loans |
Single consolidated loan |
|
Equipment loans |
Lower-rate equipment financing |
|
Business credit card balances |
Term loan or line of credit |
Short-term loans and MCAs are the most common candidates for refinancing because they tend to carry the highest costs. Replacing a daily-repayment MCA with a monthly-payment term loan can immediately free up cash flow, even if the total amount borrowed stays roughly the same.
Lines of credit are also useful refinancing tools because they give you ongoing access to funds without committing to a lump sum. If your cash flow needs vary from month to month, a line of credit might serve you better than a traditional term loan.
Tips for Getting the Best Refinancing Terms
Clean up your credit before you apply. Even small improvements can move you into a better pricing tier. Pay down credit card balances, dispute any errors on your report, and make sure all your accounts are current.
Prepare your financials like you're applying for a brand-new loan, because you are. Lenders want to see that your business is healthy and that the refinanced loan is actually less risky than your current debt.
Be upfront about what you owe. Trying to hide existing debts never works. Lenders will find them anyway, and it destroys trust. Being transparent about your situation actually works in your favor because it shows you're organized and proactive.
And don't wait until you're desperate. The best time to refinance is when your business is doing well and your credit is strong. That's when you'll get the best offers. If you wait until you're struggling to make payments, your options shrink and the terms get worse.
FAQ
Can I refinance a merchant cash advance?
Yes. MCAs are one of the most commonly refinanced products because of their high effective rates. If your business has stabilized since you took the advance, you may qualify for a term loan or line of credit with significantly better terms.
Does refinancing hurt my credit score?
There may be a small, temporary dip from the hard credit inquiry. But if refinancing lowers your debt-to-income ratio or helps you make more consistent payments, the long-term effect on your credit is usually positive.
How much can I save by refinancing?
It depends entirely on your current terms and what you qualify for. Dropping from a 30% APR to a 12% APR on a $100,000 balance saves tens of thousands of dollars over the life of the loan. Even smaller rate reductions can save several thousand dollars.
Can I refinance an SBA loan?
You can, but it's less common because SBA loans already have competitive rates. If you have an SBA loan from a period of higher rates and current rates have dropped, it's worth exploring. You can refinance an SBA loan with another SBA loan or with a conventional loan.
How soon after getting a loan can I refinance?
There's no universal waiting period, but most lenders want to see at least six months of payment history. Some loans have early payoff penalties that make refinancing within the first year or two less cost-effective. Always check your current loan terms before starting the process.
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