Do you have a business loan with less than ideal rates and terms?   

In today’s positive economic environment, you may be wondering if you should refinance your expensive loan.  Your goal is to arrange a new loan that provides you with a lower monthly payment, a longer payoff period, or a lower interest rate – or all of these benefits.  Although interest rates are now slowly rising, you can typically still arrange lower payments by lengthening your payoff period. 

Here are some questions to help you decide if a new loan will be better than your existing one. 

• Has your business changed and grown since you took out your original loan? 

Perhaps you have reached a major milestone in sales or raised your credit score or worked off a bankruptcy.  These types of progress make you a better credit risk and eligible for a wider range of financing options than were originally available to you.

• Are you carrying multiple forms of debt – such as lines of credit, business credit cards, or several small business loans? 

Investigate the possibility of consolidating all or much of your debt with one new loan.  By paying off various existing obligations and replacing them with a single monthly payment, you will simplify bill paying and better manage cash flow.    

• Does your existing loan have pre-payment penalties?

Some lenders charge penalties for early payoff of a loan – it’s their way of compensating for losing the interest they expected to earn during the life of your loan.  If your loan has a pre-payment penalty, it almost never makes sense to refinance because the savings you achieve under a new loan are typically not large enough to cover the penalties you must pay for early payoff of the old loan.

• Does the new loan have a “balloon payment” at the end of the term period? 

Some loans achieve low monthly payments, but then have a large “balloon payment” at the end of the loan.  Prepare for this payment by allowing plenty of lead time to make the necessary arrangements.  For example, if you’re going to need a new loan to fund the balloon payoff amount, start discussions with your bank one year before the due date.   

• ·                     Are you having problems with your current lender?

Big banks usually prefer to focus on big businesses, while smaller community banks typically better understand and serve small businesses.  Local banks are very often locally-owned by people who live and work in the community. 

To get the best possible attention from your bank, select one that best matches your size and scope.       

• What fees will you be charged for a new loan?

Typically, a bank loan involves certain appraisal, application, and processing fees.  However, sometimes all or a portion of these fees can be rolled into the loan amount and paid over the life of the loan instead of being due in one lump sum at closing.  For example, certain SBA loans are eligible for this option. 

Sometimes business owners consider refinancing when they have paid down a large loan and the value has gone up of the collateral being used for the loan.  An example of this in our personal lives is the value of our house going up while our remaining mortgage balance goes down.    

When this happens with business loans and assets, owners think about getting a new loan based on the higher value of the collateral asset so they have an infusion of new cash.  However, before you take this step, remember these two cautions:  first, your payments will probably go up for the new loan, so do you have the cash flow to cover the higher amount, and second, do you have a sound plan for how you’re going to use the new capital?

By answering these and other questions, you can properly evaluate your refinancing options and make the financial decision that is best for your business.  So do your homework thoroughly, ask lots of questions, and be picky in choosing your lender. 

Navin Shah is Chairman of Royal Hotel Investments, which owns and operates two hotels in Covington and one in Conyers.  He is also Vice Chairman of Embassy National Bank, a community bank in Lawrenceville that he helped establish in 2007 and has become one of the leading SBA “Preferred Lenders” in the southeast.  He can be reached by e-mail at 1kingshah@gmail.com