What is debt refinance?
Debt refinancing replaces one or more existing debts with a new loan, often offering more favorable terms. This process helps businesses reduce interest rates, consolidate multiple loans into one, adjust the structure of their debt, or free up cash for other needs. Ultimately, borrowers use refinancing as a strategic tool to improve their financial position by securing better repayment terms.
The SBA 7(a) loan program offers a popular option for small business debt refinancing. Business owners find this program attractive because it offers competitive interest rates, longer repayment terms, and lower monthly payments compared to other financing options.
What types of debt can be refinanced?
You can refinance any business-related debt, such as business loans or credit card debt in the name of the business. Under certain conditions, you can even refinance an existing SBA loan with a new SBA loan. However, it’s important to note that personal debts cannot be refinanced with an SBA 7(a) loan, as these loans are specifically designed for business-related expenses.
Example of debt refinancing with an SBA 7(a) Loan
Business Scenario:
A small retail business has two existing loans:
Equipment Loan: $80,000 at a 15% interest rate with a monthly payment of $1,920
Short-Term Loan: $40,000 at a 18% interest rate with a monthly payment of $1,150
These loans have a high monthly payment, totaling $3,070. The business owner wants to reduce these payments and free up cash flow.
Solution:
The business owner decides to refinance the debt with an SBA 7(a) loan at an 11.25% interest rate. They apply for a new SBA loan of $120,000, which covers both existing loans.
Results:
Lower Interest Rate: The new 11.25% interest rate is lower than the previous rates, resulting in a reduced monthly payment of $1,665. This results in monthly savings of $1,405.
Consolidated Debt: The two loans are consolidated into one, simplifying debt management.
Improved Cash Flow: With the lower interest rate and longer repayment term, the business has better cash flow, allowing for reinvestment into the business. However, you may get approved for a working capital loan that exceeds the amount of debt you wish to refinance, leaving you with additional working capital to grow your business.
How to refinance your small business debt with an SBA 7(a) Loan
- Evaluate your existing debt: Do you have multiple debts, high interest rates, or uneven cash flow? Consider applying for an SBA 7(a) loan to restructure your existing debt under more favorable terms.
- Work with an SBA-Approved Loan Service Provider: Not all lenders provide SBA loans. It is important to work with an approved lender that can guide you through the process. Alongside Northeast Bank, NEWITY can guide you through the loan process and get you funded 3x faster than the national average.
- Eligibility Requirements: To refinance your debt with an SBA 7(a) loan through NEWITY you must be…
- In operation for at least two months as a for-profit business
- US-based location and operations
- Owner supported / owner funded
- Eligible per the SBA’s requirements
- Loan size determined by average annual revenue of the business and FICO score
- Prepare Documentation: To determine your eligibility, you only need to provide 3 documents:
- 2022 & 2023 Business Tax Return
- 2023 Personal Tax Return
- Past 3 months of business bank statements
- Application Process: Create your NEWITY account and submit the loan application, this should take you less than 10 minutes and will not impact your credit score. Additionally, a team member will guide you through the process and request any additional documentation if necessary.
- Approval and Closing: If approved, a member of NEWITY’s loan team will review your application and inform you of which existing debts are eligible for refinancing. The SBA 7(a) loan funds will then be used to pay off those eligible debts. The remaining balance will be available for eligible working capital expenses.
This refinancing strategy not only reduces the financial burden on the business but also provides flexibility for future investments.
