Having worked in the SME space for the past couple of decades, I have noticed a certain pattern that is not all that surprising. The more experience a person has in business, the better business loan they are likely to get.
The simple reality is that, until you have run a business, you don’t really know what running a business takes. You underestimate expenses, overestimate profits, and rely on the wrong people to give you accurate information.
Many SMEs run by first-time business owners end up with expensive loans that don’t even cover everything they need. Often, they have listened to their banker without negotiating or even knowing the right questions to ask. I’ve been there before, and it is nothing to be ashamed of. Most people are not lucky enough to have the ideal mentors to guide them through the process.
There are other reasons you may have gotten short shrift on your business loans. It is possible you started your business during an economic boom, during which lenders were optimistic – but knew every business had a lot of competition. Maybe you were also struggling with some bad debts at the time and, as the owner of the business, had difficulty finding sympathetic lenders.
Here is what you need to consider.
The pros and cons of refinancing your business loan
The pros of refinancing your business loan are relatively straightforward.
- You may get a better rate. This frees up money in the short term and makes it easier to pay off your loan in the long term.
- Increase your cash flow. With better rates, you have more money available to pay for business expenses and salaries. Alternatively, you can refinance with a more long term loan in order to pay significantly smaller monthly installments, making it easier to keep your business running.
- Releasing securities. When you were starting your business, it may have been in your best interests to use securities to get a reasonable rate. Now, with a business that has been running for a while, you may no longer need to use that security. Refinancing provides an opportunity to release the security, which is especially beneficial if you are looking to sell it in any case.
- Consolidate your debt. Refinancing can also be a way of consolidating a number of debts. Instead of keeping track of different loans and payments with different rates, you can get one big loan to cover it all, saving you time and potentially money.
There are, however, also a few downsides to potentially refinancing your loan.
- The original lender may charge fees or penalties. Ultimately, it is to their detriment to sell your debt, and any agreements you signed at the time of the loan may come into play. Check first before considering refinancing.
- The new terms could end up making the repayment period much longer. This may be what you want, but it does mean that you end up paying more in interest over the entire period, and that your funds remain depleted by payments for longer.
- It can damage your relationship with the lender. It is possible that you have a number of different loans or financial agreements with this lender (especially if it is your bank), and refinancing with another lender could end up working against you. They may not be as willing to make compromises and the original lender may no longer give you the same benefits.
Refinancing your loan can be a great way of saving money. But the benefits also largely depend on the circumstances in which you are refinancing. In 2020, there are a number of crises, mostly triggered by COVID-19. Is this a good time to refinance your loan?
Should I refinance my loan in 2020?
COVID-19 has definitely had a serious impact on economies around the globe. Chances are, your business is suffering for it as well. However, that does not mean it is a bad time to refinance your loan. On the contrary, this could be the perfect opportunity.
The reality is that, in a struggling economy in which businesses are closing and people are losing jobs, lenders are not handing out all that many loans. Some of this is due to the fact that they are wary of lending to businesses that may never get off the ground, but it is mostly because few people are in a position to even think about starting a business right now.
With fewer new business loans in demand, you may well be able to get a refinancing loan at a much better rate than in any other year. If your business has been successful up until now, and you have not missed payments on your current loan, you are a safe bet for lenders – much more so than most other loan-seekers.
In other words, you are in a good position not just to get lower rates, but to negotiate the conditions of your loan. When refinancing, negotiation is always important, and now more than ever you should not just go with the first offer you are provided.
At the same time, your current lender will be all the more motivated to keep you. This can work for or against you. It means that you may be able to negotiate with them for better rates and conditions. However, it may also mean that they are more ruthless in charging fees and penalties, and finding any clauses which benefit them and disadvantage your attempt to refinance.
In 2020, there are opportunities for businesses in good positions, and it may well be the perfect time to refinance your loan. It is at least a good idea to look at your options, if only with the potential of renegotiating the conditions on your current loan.