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Is it Time to Refinance?

Simple guidelines to help you decide

As the economic climate continues to fluctuate and interest rates hover at record low levels, it may be a good time for small business owners to consider refinancing.

Paying off current business loans with a new loan consolidating your debt at a lower cost can help increase cash flow, which can be especially helpful in an uncertain economy.

To determine if this is an opportune time for you to refinance, it's important to first identify your refinancing goal. Goals can vary from seeking to consolidate business debts to converting a loan from an adjustable-rate loan--a loan subject to changes in interest rates based on changes of a predetermined index--to a fixed loan. The latter is especially relevant for entrepreneurs who want to avoid potentially higher payments when their adjustable-rate loans reset.

While rates, fees, loan terms and conditions may vary by bank, once you've set your goal, the following are a few general guidelines to help determine optimal timing for refinancing.

  • Current business loan rates. If the rates are at least one point lower than your current interest rate, it may be a good time to consider refinancing.
  • How long you plan to keep your business. If you plan to keep your business long enough to recover the cost of refinancing, it may make sense to refinance. Fees associated with refinancing often include initial fees for points (an upfront interest charge equaling 1 percent of the total loan amount), appraisal fees, application fees and closing costs. It's imperative to request a breakdown of fees included in closing costs ahead of time.
  • Equity. It's important to have equity in your business before refinancing. Having equity puts you in a better position to obtain a more beneficial loan rate.
  • Be mindful of your credit score. Now, more than ever, lenders are looking for higher credit scores. Before you consider refinancing, review your credit report and resolve any negative issues or inaccurate information that could affect your loan terms and, in some cases, your interest rate.
  • Contact your banker. Contacting your banker or financial advisor will provide you with added knowledge about current interest rates, loan options available to you and where you stand in terms of obtaining an optimal loan for your business needs.

If you determine this is the right time to refinance your business loans, it's important to update your business plan before meeting with a lender. Your business plan should serve as a road map for your business.

As part of your business plan, it's important to provide details about your relevant industry expertise as well as tangible successes attained while owning or operating a business. Prior successes may include revenue growth, business expansion and securing new projects or clients. Your management team is also integral to your success. Therefore, providing a track record of your team's expertise and industry successes may help boost confidence in your company's ability to compete in your market sector.

Additional items you may want to include in your business plan are:

  • At least two years of financial statements and tax returns
  • Highlights of your company's strengths/challenges
  • A list of projects and clients strengthening your firm's bottom line
  • Your business goals for the next three to five years. Detail how you will use the increased cash flow from your refinanced loan to build profits.
  • Significant milestones your company has achieved
  • A copy of your current note and payment schedule

The foregoing is intended to provide general information about refinancing and does not represent specific products available through Union Bank.

Joseph Benoit is the small business banking executive for Union Bank , N.A. Visit

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