It was during the credit crunch that innumerable entrepreneurs got the cold shoulder from their banks and turned to other high interest lenders and took out debt consolidation loans at outrageously high rates. Now that we’re about to step into 2015, it is indeed the ideal time to forget about the past snubs and try getting a bank loan to refinance all the costly debts that you had taken before, says the experts. With business loans from the Small Business Administration (SBA) available at less than 6% interest rate and the SBA waiving off the fees on loans under $150,000, the small business firms seems to potentially save a lot.
If the small businesses wish to get back their expensive money back now, this is perhaps the best time to refinance their debt, says expert Jana Rouble, BDA for SBA & USDA loans. The sole reasons behind saying this are that the interest rates are indeed too low. Nowadays, a growing percentage of institutions, including banks are opening the spigots. According to a report in January, 2014 by the Office of the Comptroller of Currency, 23% of banks reported easing credit underwriting standards in 2013, while 80% of banks kept the borrowers’ requirements unchanged. None of the 45 banks that were involved in small business lending said they had tightened the requirements to get a loan.
Is it Worthy to Opt for a Refinance Loan Now?
Even if you don’t qualify for a bank loan now, if you had turned to a dearer alternative during the credit downturn, you may now find that it’s worth shopping around for a better deal. Increased competition among the small army of alternative lenders fighting to get a small share of the market has helped some small business owners sniff out some truly better deals. In fact, there are instances of people refinancing a 12 month microloan with a loan that offered him interest rate that is below 20% and this saved them a bundle over the previous rate. The lenders don’t require you to offer personal guarantee but the borrowers need to make daily repayments through an ACH debit card from their bank account.
Key Questions to Ask Yourself Before Refinancing
So, how do you figure out whether this is the right time to refinance your small business loan? Here are some questions that you should ask yourself.
- How competitive are the terms of your present loan?
In the present economic environment, taking a look at the interest rate is obviously the starting point. Generally banks and credit unions will offer you some of the lowest interest rates. For fixed-rate SBA loans for working capital, the current rate presently ranges between 5.5 and 6%, depending on the maturity date of the loan. If you’ve borrowed a significant amount of money on your credit cards, you could easily cut your overhead by getting a bank loan (might be a debt consolidation loan) to pay down those balances. And for all those who had turned over to a very high-interest lender, it’s even worth shopping around, even if your credit isn’t perfect.
- How much interest rate is left to pay on your loans?
Are you nearing the end of an amortized loan where the interest rates dominate the early payments, principal and the later ones? If answered yes, refinancing with a new loan will not improve your current financial situation. If you have a loan that you’ve been paying for the last 10 years and you’re at the point when you’re paying only the principal amount, it may not make sense to refinance such a loan. Even if the rates are high, by the time you’re nearly done with the loan, it will be a sunk cost. In such cases, you’ve already paid the bulk of the interest rates and most of your dollars are going towards repaying the principal amount.
- What are the costs of getting a new business loan?
Make sure that fees and ancillary costs could wipe out any savings that you could have made from refinancing, so do your own calculations right. Although there are no fees on SBA loans that are under $150,000, larger loans usually cost more. For loans from SBA that are $150,000 to $700,000, fees are 3% of the SA guaranteed portion, fees rise to 3.5% for the loan of more than $700,000. In case you’ll be using commercial real estate as collateral for your loan, you also require factoring in the cost of an appraisal.
Therefore, before you opt for a refinance of your business loans, make sure you ask yourself the above mentioned 3 questions. In order to get an SBA-backed loan, you have to prepare a phone-book size pile of documents, including 3 years of tax returns and 1 year of statements. Have the patience of completing these tasks.