Is your company profitable but wasting money on high debt payments? Do you owe multiple lenders in a complex array of repayment terms? Do you spend time every month or week shuffling cash to make sure there is enough? Business debt management can drain the energy out of an organization. Refinancing business debt is a great way to shed past mistakes, improve cash flow, and sleep better at night.
Should I refinance my business debts?
Not all debt is suitable for refinancing. Business loan refinancing is laborious, and managers cannot afford to waste time on a project that bears no fruit. CFO consulting services can evaluate your specific debt situation, but here is a brief description of different types of debt and their suitability for refinancing.
Merchant Cash Advances (MCA) – Refinance
MCA loans are quick, easy, and expensive short-term loans offered online by various companies. Have you seen a popup ad from Shopify or Paypal offering you an instant $10k advance? That’s an MCA loan. Small businesses often get trapped in an endless cycle of fast and easy MCA loans with interest rates as high as 50%-75% APR, making them the outstanding business debt to refinance.
AR Factoring and other Asset Based Lending (ABL) – Refinance
AR factoring is when you sell your accounts receivable at a discount for quick cash. These discounts are usually between 1-3% of the total invoice amount. Factoring is a great way to reduce working capital, but factoring fees often equate to 25%-50% APR.
ABL is debt secured by specific AR invoices, similar to factoring. ABL debt can be just as expensive as AR factoring, so try to refinance out of these arrangements when you can.
SBA Loans like 7a, 504, PPP, and EIDL – Do Not Refinance
The Small Business Association (SBA) loans are outstanding for companies in risky situations where no one else is willing to lend – such as in an early-stage startup or when the owner has little or no collateral. A typical SBA loan might provide $250k of working capital on a 7-year amortization at 9% APR. Since the government subsidizes these loans, there are seldom situations where you can refinance an SBA loan into better terms.
In fact, the opposite is true – SBA loans are great programs to refinance bad debts into! You should especially consider SBA loans if you are a member of their targeted demographics: racial minorities, women, and veterans.
Vehicle and Equipment Loans – Maybe Refinance.
Car, truck, and machinery loan terms may be anywhere between reasonable to toxic. Since vehicles and machines depreciate quickly, there is often not enough value to justify a refinancing effort. However, if you hold a subprime vehicle loan with high interest rates, it may benefit you to refinance your business debts.
Bank Lines of Credit (LOC) – Do Not Refinance
Bank LOC’s are one of the best loans for businesses to secure. LOC’s have low APR’s (6-10%), interest-only payments, can be drawn upon when needed, and paid back at your leisure. Like SBA loans, these are outstanding loans to refinance into.
Convertible Notes, SAFE agreements, and Related Party Debt – Do Not Refinance
Lending institutions cannot refinance pseudo-equity business debts like SAFEs and founder loans. Some startup founders believe an equity investor may be willing to refinance business loans – that’s a myth. Venture capitalists never want their cash used for debt refinancing, and few angel investors are willing to put money towards refinancing.
How to refinance business debt
Business loan refinancing requires quite a bit of work. Here’s the process for refinancing business debts:
- Clean up historic accounting
- Prepare pro forma financial forecast
- Schedule a meeting with lenders
- Provide documents quickly during diligence.
Clean up historical accounting.
Lenders are not likely to take on the risk of your business if your financial statements are messy.
Prepare financial forecast statements.
Companies that need to refinance business loans likely have historical operating losses (hence why they took on bad debt.) Your lender will want to understand how the future outlook is better than past performance, so come prepared with a strategic business forecast. Work with an outsourced CFO to ensure your projections are accurate and compelling.
Schedule meetings with 3-5 lending institutions.
Start with the banks you have a history with, then reach out to other local or regional banks. Banks are constantly adjusting their risk appetite, so while the strength of your business matters, timing and luck also play a role. Stay away from the big national banks that have difficulty accommodating small businesses.
The lender will want to know your financial strategy for improving business performance. Be ready to discuss the business plan and financial projections. You should bring your fractional CFO to the meeting to give your financial strategy more credibility.
If your small business is not bankable, reach out to CDFI’s in your area. These not-for-profit lenders have a mission to help small businesses and will take risks other lenders will not.
Provide documents during refi due diligence.
Closing your loan will require lots of documents, so be prepared to provide the following, at a minimum:
- Historic business financial statements
- Pro forma financial forecast
- Three years’ business tax returns
- Three years’ personal tax returns
- Personal financial statement
- Most recent business bank account statements
- Loan documents for your existing business debt
Despite what you may have heard about LLCs in business school, high-quality small business debt requires personal guarantees. Any loans that do not require a personal guarantee will likely cost 20% more than their PG equivalent.
Professional business loan refinancing.
An outsourced CFO pays for themselves during business loan refinancing. Contact us for a free consultation to see if CFOshare can help refinance your business loans.