How to refinance a business loan: step-by-step guide

Feeling stuck with the harsh terms of a long-term business loan? Refinancing could be the solution. As your business grows — whether through more clients, new assets or rising profits — your financial position generally improves. This can open the door to better loan terms. If this is your situation, refinancing could help cut costs and boost cash flow. Here’s what you need to know to get started.

Key takeaways

• Refinancing can reduce interest rates and monthly payments

• It’s important to verify that your credit score and business performance have improved before applying

• You should check your new fees and interest rates to ensure refinancing benefits your business in the long term

What is business loan refinancing?

Refinancing a business loan means replacing an existing loan with a new one. Businesses do this to secure better interest rates, reduce monthly repayments or extend the repayment terms. Refinancing can also consolidate multiple debts into a single loan. Together, these benefits can improve cash flow, free up funds for growth and help manage debt more efficiently.

Key things to consider before refinancing

Refinancing can offer significant benefits, but you need to assess whether it’s right for your business and situation before agreeing to a contract.

Financial circumstances 

Review your business’s profits, revenue and cash flow. Have they improved since you took out your existing loan? If so, refinancing may offer better terms. If not, focus on improving these aspects first.

Business assets

Does your business now own more equipment, property or machinery? Have you increased your monthly invoices? Lenders value assets — especially for secured loans — as they provide collateral. More collateral strengthens your position and reassures lenders of your ability to repay.

Credit score

Check your personal and business credit reports for free with agencies like Experian. Has your credit improved since you took out your current loan? If not, improve it to help you secure better terms and rates.

Market rates

Timing is crucial when refinancing. If inflation is high and the Bank of England raises the base rate, new interest rates may exceed those on your current loan. Research the market to ensure you can obtain more competitive rates before proceeding.

Fees

Refinancing has costs. Lenders may charge an application or origination fee – usually 0.5% to 5% of the loan amount. You might also face an early repayment charge on your original loan. These fees can add up, so ensure refinancing improves your position. 

How to refinance a business loan in five steps

When you’re sure refinancing is the right move for your business, follow these simple steps:

1. Understand what you owe

List the debts you want to refinance. Note the total amount owed, monthly payments and annual percentage rate (APR). Also, check if your lender charges an early settlement fee and factor this into your sums. 

2. Review the options

Next, explore loan options. Compare interest rates, terms and fees against your current loan. Don’t settle for the first loan you find – ensure the terms meet your needs and offer better conditions than what you have now. Use a loan repayment calculator to work out the details.

3. Prepare the paperwork

Gather the necessary documentation in advance to streamline the application process:

• Bank statements: Ideally, 12 months’ worth 

• Financial statements: Cash flow forecasts, profit and loss statements and balance sheets, ideally covering the past two years of trading

• Existing debts: Include credit agreements, APR and monthly repayments

• VAT and tax returns: Lenders may ask for supporting evidence to verify your declarations 

• Business information: Includes proof of address, personal details about you and any company directors, ID (such as a passport or driver’s licence) and your company registration number, if applicable

4. Apply for the new loan

Once you find the right loan and gather the necessary paperwork, apply online, by phone or in person. 

5. Pay off your original debt(s)

Once the lender approves the loan and provides the funds, use them to pay off your existing debt. Then, make monthly repayments to the new lender. 

Pros and cons of refinancing a business loan

Refinancing a business loan offers many advantages, but it also has disadvantages to consider.

Pros

• Lower interest rates: Refinancing can secure a lower rate, reducing overall loan costs

• Improved cash flow: Lower monthly repayments free up cash for other expenses 

• Consolidated debt: Merges multiple loans into one, simplifying repayments and reducing stress

• Flexible terms: Refinancing can extend the loan’s duration, giving you more time to repay

Cons

• Fees and costs: Refinancing may involve fees, like application charges or early repayment penalties, reducing savings

• Longer loan term: Extending the duration lowers monthly payments but may increase total interest over time

• Impact on credit score: Mismanagement of refinancing can hurt your credit score, especially if you miss repayments

• Secured loan risk: Offering assets as collateral risks losing them if the business defaults