If you feel that your small business loan payment is stiffer than it was a year ago, you are not alone. In fact, interest rates in the U.S. have changed considerably over the past few years. Some business owners took a loan at a higher rate, and now they might be paying a stiffer amount than what is required every month. Therefore, knowing how to refinance will help you lower your small business loan payment.
The Importance of Interest Rates for Your Small Business
Interest rates play an important role in determining how much you’ll pay for a small business loan. A small drop in interest rates can lead to significant savings over the long term. For instance, you may have purchased a $250,000 small business loan at a 9% interest rate. If the market falls to 7%, refinancing could potentially save thousands of dollars per year for you as a result of decreasing your monthly payment by two percentage points. The overall economic climate can often dictate the movement of interest rates. When the Federal Reserve makes changes to their benchmark rate, it typically has a ripple effect across commercial lending. These types of changes often create opportunities to refinance your current loans.
The 2% Rule: A Straightforward Decision-making Point
A 2% rule is one of the most commonly agreed-upon guidelines. When market rates are at least two percentage points lower than the rate on your current loan, it’s generally a good idea to crunch the numbers. Usually, a 2% decrease is sufficient to:
- Cover refinance fees
- Significantly lower your small business loan payment
- Reduce total interest paid over the life of the loan
In case the saving only amounts to a few dollars a month, then refinancing will probably not be worth the closing costs or any prepayment penalties. On the other hand, if the savings significantly cut down your small business loan payment, this will be a tactical decision.
When Cash Flow Is Tight
Refinancing is not just about saving money on interest. It may also provide assistance if you’re facing a short-term cash flow problem. If you’re not making as much money as you once did but still have a good long-term outlook, reducing your small business loan payment may free up working capital. Refinancing may also reduce your small business loan payment by extending the term of your loan. Just remember that you will pay more in interest.
Improved Credit Score? Time to Reevaluate
Your credit score or your credit report may have improved since you obtained funding; therefore, you may be eligible to obtain a better rate or a better loan with a reduced payment. Better financial statements and revenue growth, in addition to lower debt-to-income ratios could potentially cause you to qualify for a lower small business loan payment after refinancing your business loan. Every lender has a methodical and quantitative approach to assessing your credit worthiness. If you now demonstrate less risk than you did at the time of your initial application, it is in your best interests to investigate additional offers of financing terms.
Comparing Traditional Loans and SBA Options
Just imagine, if you have a high-interest online loan or short-term financing now, you could make a huge saving on your small business loan payment by refinancing into an SBA-backed structure. An SBA loan payment will likely be more in your budget as the main reason is that SBA loans generally have longer terms and more competitive rates. That mix can lower monthly liabilities while giving you a stable situation. Still, be sure to always consider total cost. Some business loan repayments may be so stretched out that the total interest paid is higher. Don’t look at just monthly savings but also the overall effect on your finances.
Look Out for Fees and Prepayment Penalties
It’s important to read your loan contract before you refinance. Some lenders may charge prepayment penalties. Some lenders also charge fees to refinance. These fees must be deducted from the expected savings on your small business loan payments. A good rule of thumb: If you are saving money on your business loan by refinancing and it takes less than 12 to 18 months to cover all the fees, then it’s a good decision.
Is It Time to Take Action?
If you have reached one or more of these situations, you should think about refinancing your small business loan:
- Market interest rates lowered 2% or more
- Your personal credit has improved dramatically
- Your monthly cash flow needs improvement
- You originally utilized or obtained high interest emergency loan
Refinancing can significantly reduce your small business loan payment by decreasing your small business loan interest expense while also providing you with more options to handle your small business finances.
Conclusion
Your small business loan payment should be a tool for helping your business grow, not holding you back. By paying attention to the trends in interest rates within the US, you can wait for the right time to refinance by looking for a drop of two percent in market rates. This can be a powerful tool if used strategically, helping to reduce costs, alleviate pressure on the cash flow, and give you a more stable financial platform with a more favorable small business loan payment.
