Business loan refinancing can potentially save you thousands of dollars. However, you can lose money instead if you haven’t planned beforehand.
Learn about the business loan refinancing process and what considerations to make.
How difficult is it to refinance a business loan?
Refinancing is basically applying for a mortgage all over again. It usually involves paying off your current business loan with a new one. You can also consolidate your debt at a lower cost.
A business loan isn’t regulated by the National Consumer Credit Protection (NCCP) act. This means that lenders can generally be more flexible with their policies.
However, you’ll still need to convince the lender that you’re a low risk borrower. You must provide detailed information about the financial history of your business. A well researched business loan proposal can help you significantly.
You shouldn’t have much difficulty as long as you’re a strong business and you can provide the following:
- Proof of your business income. This can include two years’ bank statements and tax returns, and projected cash flow statements.
- A well researched business plan. This should include your business goals and how you plan to meet your repayments.
- Some lenders may need copies of your loan statements for the last six months.
- A clean credit file. Lenders prefer businesses without any bad credit records and a high credit rating.
Please note that lenders will generally want you to have no missed payments on your existing business loan. However, some lenders may accept up to two missed payments.
What’s the business loan refinancing process?
The business loan refinancing process is fairly simple. If all goes well, you can refinance a business loan in five steps:
- Decide if you want to refinance: Refinancing may not be a good choice if you’re on a fixed rate. Depending on your loan contract, you may also have to pay expensive exit fees.
- Choose the right loan and lender: Shop around for a mortgage. Select the lender that can offer you the interest rate and features you want.
- Apply for the mortgage: Prepare your documents and apply for the mortgage. The new lender can get your information more easily if you inform your existing lender beforehand.
- Get approval: You’ll get formally approved after the lender receives and checks all of your documents. If you have a security property, the lender may want it to be revalued. You then move on to the final step in the business loan refinancing process.
- Settlement: The new mortgage will now be used to pay off the old one. Settlement occurs after you sign the new loan contract. You’ll start paying off the new mortgage usually within a month after settlement.
We have mortgage brokers who specialise in business loan refinancing. We can help you find and choose the right lender. We can also help you get approved.
You can speak with one of our specialists by calling us on 1300 889 743. You can also fill in our free online assessment form to find out if you qualify.
How can I benefit from refinancing?
There are many reasons to refinance a business loan. The most common reasons include:
- For a more competitive interest rate: A bank’s loyal customers may not realise that they are paying more. This is mostly because banks tend to have attractive rates for new customers. If you don’t get a good rate discount by your bank, you can refinance to another.
- For debt consolidation purposes: Up to five different debt facilities can be consolidated into your mortgage. This will allow you to manage your finances by having you pay only one monthly payment. This way, you can avoid having to manage several payments with different lenders.
- To get access to equity: You can refinance a business loan to access equity from your property. This way, you can use it as extra working capital or funds for investment.
- To get extra loan features: If you have a long loan period, you can refinance to get extra loan features. Additional loan features such as offset account and extra repayments can help you pay off the loan quicker in the long run.
- For potential tax benefits: You can refinance a business loan to take advantage of negative gearing and depreciation benefits. However, it’s recommended that you speak with a tax professional before refinancing.
Considerations before refinancing
You’ll likely regret it if you refinance a business loan without making any prior considerations. Consider refinancing only if you know what you’re doing and how it will affect your business.
It can be a good idea to make the following considerations before refinancing:
- Your goals: Refinancing ultimately depends on your goals. You can refinance to get a better rate, more features or switch loan products. If it doesn’t meet you or your business goals, determine why you want to refinance. You’ll also have to consider whether or not you’d be better off afterwards.
- Timing: If you’re on a fixed rate, you may have to pay a costly discharge fee to switch lenders. If you’re on a variable rate, you can consider refinancing every two to three years. If you want to invest using equity, your lender may not let you release it. However, you can access equity by refinancing with another lender.
- Associated costs: To refinance a business loan, you’ll need to prepare for quite a few associated costs. This can include exit fees, valuation fee, settlement fee, government fees and more. You may have to pay a whole lot more for just a marginally lower interest rate.
- Loan product and lender: Depending on your goals, you’ll need to shop around for the right lender. Not many lenders may be able to provide you the rate and deal you want. This is where a mortgage broker comes in. A specialist can help you choose the right lender.
- Enquiries on your credit file: Note that applying for refinance will add an enquiry to your credit file. Enquiries can get stacked up if you don’t get approved. This is specifically if your conduct at the previous bank hasn’t been quite good. As a result, your credit rating will be lowered. You may find difficulty getting approved for other finance products.
It can also be a good idea to speak with a financial advisor or tax professional before you consider refinancing your business loan.
What are the business loan refinancing costs?
To refinance a business loan, you’ll generally have to prepare yourself for the following costs:
- Borrowing costs: You may need to pay an upfront fee to the new lender. However, not all lenders may charge this when you refinance a business loan.
- Loan application fee: Some lenders can charge you an application fee when you apply for the new loan.
- Break costs: Break costs are usually applicable if you’re on a fixed rate and refinancing before the fixed term ends. Although there’s no rule for these costs, they can be as high as $10,000. So, you’ll need to consider this carefully.
- Exit fees or discharge fee: Although exit fees are abolished, you may have to pay a discharge fee to the lender. This can cost around $100 to $350 depending on the lender.
- Valuation fee: If you’ve bought an equipment or commercial property with a business loan, it will need to be revalued. Lenders may charge you a fee for this. Generally, you may have to pay $2,000 to $5,000 on this.
- Settlement fee: After you get approved, you may have to pay a settlement fee to complete the business loan refinancing process.
What can I watch out for?
Even if you’ve prepared yourself for refinance, you may face a few hurdles before getting approval.
If you’re refinancing a loan that you used to buy a commercial or investment property, the lender will look at the lease. For most lenders, the lease term will have to be more than the term of the loan. However, there may be some exceptions to this.
The property type will also be considered. Lenders prefer easily saleable properties.
Another major factor can be the costs you’ll have to pay. Among them, the most expensive are usually application and valuation fees.
For valuation, you may have to pay up to $5,000. Application fees may be a percentage of the value of the property. Even a 0.5% fee will be expensive if it’s on a $1 million property so watch out.
However, if it’s a residential investment property then valuation will usually be free. Although this is a preferable property type, the rental income will be considered.
Also note that loans for commercial properties are more expensive. They also tend to be more competitive though. This means applying with the right lender is key to getting a good deal.
When is it a good time to consider refinancing?
It can be a good idea to refinance a business loan if:
- You’re planning on renovating your commercial property or business equipment.
- Your business loan is no longer suitable for the current situation.
- You want to reduce your overall mortgage repayments.
- You want to access equity in your business.
- Your fixed rate term has ended.
- You want to consolidate your debts.
- You plan to keep your business long enough to recover from the cost of refinancing.
Refinancing may not be a good option if you’re having trouble making your mortgage repayments. You’ll need to assess carefully if refinancing will save you money or simply bring in more debt.
Our mortgage brokers have many years of experience in the mortgage industry. We know which lenders can offer the most competitive rates and deals.
Call us on 1300 889 743 or complete our free online assessment form today.