Rising Federal Reserve Doesn’t Need to Derail Business Loan Refi – NerdWallet

With the Federal Reserve’s recent interest rate hikes, federal funds ratesmall business loan borrowers may think they have missed the opportunity to refinance to lower interest rates.

Not necessarily. Business loan rates are affected by more than just the Federal Reserve, so low interest rates may still be within reach. A better interest rate may help, but it’s not the only reason to consider refinancing. Here are some things to keep in mind when considering your options:

Advantages of refinancing a business loan

Securing low interest rates

Loan type, collateral, borrower qualifications, and years in business can all play a role. business loan interestFor example, if you’ve been in business for years and have built up a credit score or have collateral to secure your loan, you may be able to take advantage of lower interest rates that weren’t an option before. I have. you.

Luis Ramos, Business Advisor Director of non-profit lender Axion Opportunity Fund, said: This is especially true if you were just starting your business when you first received your funding. “Usually when they first take out their loans, the interest rates are much higher than they have been in business. [operation] Ramos says.

Fixed interest rate

The Federal Reserve has indicated that additional rate hikes are likely in the future. Borrowers who currently have variable-rate loans may be able to refinance to fixed-rate loans to provide stable monthly payments in the future. However, keep in mind that interest rates for fixed rate loans are usually higher than initial interest rates for variable rate loans, and not all lenders or loan types offer fixed rate options.

Floating interest rates may be higher than expected due to rising federal funds rates. When considering whether to refinance a variable-rate loan, Ramos suggests considering how higher interest rates and the accompanying increase in monthly payments will affect your cash flow. If you are not comfortable making monthly payments, you have the option of considering a fixed interest rate.

reduce monthly loan payments

your amount monthly loan payment It can have a significant impact on how your business operates. If cash flow is a concern, refinancing your existing loan to reduce your monthly payments can give you some breathing room.

Cash flow is very important, according to SCORE mentor and nonprofit organization Resource Partner of the Small Business Administration, Frank LaMonaca. “A business doesn’t fail just because the interest rate on the loan is reasonable. If something goes wrong, it fails due to lack of liquidity,” he says. Small business owners should “focus on cash flow. It’s what helps them survive day-to-day and in any challenge,” he says.

Avoid balloon payments

Refinancing is a way of avoiding large cash outlays for borrowers where the loan includes a lump sum payable at the end of the loan term, commonly referred to as a balloon payment.

“If you find yourself in that situation, always be on the lookout for opportunities to get out of balloon payments that make financial sense,” says LaMonaca. “My advice is to start refinancing. [loan] At least one year before maturity. ”

Things to keep in mind when refinancing a business loan

advance payment penalty

If you face penalties for paying off an existing loan early, weigh the cost of the penalty against the benefits of a new loan to make sure you are making the best financial move. gives you more flexibility to repay your loan at a more favorable time by choosing a loan with no upfront penalties or other types of surrender charges.

loan fee

Business loans usually include fees in addition to interest. for example, SBA loan A guarantee fee is usually required for each loan, including refinancing. Loan fees are generally added to the principal of the loan. While it may not significantly increase your monthly payment or total loan amount, these fees are something to consider when weighing the pros and cons of refinancing.

your financial situation

The underwriting process for refinancing is the same as for any other business loan. Checking the loan requirements on the lender’s website or talking to a representative before applying for a loan can save you time and potentially money. Review your business and personal credit history, debt-to-income ratio, accounts receivable, and annual earnings to assess your eligibility for a new loan.

Small business owners can also contact nonprofits like SCORE for free counseling, or talk with a local banker, accountant, or business attorney to see the benefits of refinancing an existing business loan. I can do it.

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