When is Refinancing a Business Loan a Bad Idea?
By Anupama Deshpande | September 04, 2019

Whenever you start any business, it require funds to grow. It is not always possible to fulfil this requirement from the money from your own pocket that is why you need to take a business loan. While taking loan, you may face limited options due to the age of your business or your credit history. Then you take the loan from a lender on not so good terms and interest rates.

After a few years, when your business has grown to a certain extent, it gives you access to a wider range of business financing possibilities, moreover, now you may have adequate time to shop around for a better option. At such time, you can get your existing loan refinanced from any other lender whose offers are favourable and cost effective to you.

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Refinancing can be understood in simple terms that when you refinance your business loan, you take a new loan and pay off your existing loan immediately using the funds/ loan you obtain afresh.

People prefer refinancing their business loans when their credit scores have improved, business age is improved and business revenue is also improved marginally. So they replace their existing business loans with a better alternative. Other times are also there when is refinancing a bad idea

It is also be noted that refinancing a business loan may not always be the best idea. There are some situations when you feel that it better to stick with the existing lender instead of switching the loan. Your choice to refinance or keep your current loan depends on various things. Refinancing will be fruitful only when the new loan works better than your existing loan.

There are a few circumstances when is refinancing a business loan a bad idea, which are outlined below:

You should very well be aware of the transaction cost of refinance, including the fees that come with paying off your current loan.. It is very necessary to calculate the exact amount of the total transaction cost which will be there if you get your business loan refinanced. If the cost of refinancing outweighs the actual benefits you get after refinance of your existing loan and high transaction cost is involved in refinancing your business loan then it is a bad idea to refinance your business loan and at such times, you should skip your idea of refinancing.

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It is necessary to know that businesses separately have their own credit apart from your own personal credit score. Your business may have a good credit or a bad credit. If your business is not having a good credit score, you will not be able to access the best interest rates and favourable features of a loan. In this situation, refinancing is not the best option.

Many a tome it happens that your bank has an in-depth understanding of your business, its history and other requirements of your business. When you have a long-term relationship with the bank from which you have availed your business loan then the switch to another lender can harm this relationship.

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Some lenders offer useful features on the business loans which will be eliminated, in case you get your loan refinanced from other lender. You must consider all such benefits while deciding upon whether to switch your existing loan.

You should not opt for refinancing your business loan as soon as you have not been officially approved for it from your existing lender. Also you must evaluate the terms of a new loan beforehand. Before finalizing the new lender selected for refinancing, you must identify all the lenders who are likely to be a good fit and then narrow down the list and select the best out of them. You may also take the help from a professional for the same.