Time to refinance small-business debt? Five questions to ask
entrepreneurs got the cold shoulder from their banks during the credit crunch
and turned to other, high-interest lenders or credit cards instead. Now could
be a good time to forget about past snubs and try to get a bank loan to
refinance costly debts, say experts.
from the U.S. Small Business Administration available for less than 6 percent
interest and the SBA waiving fees on loans under $150,000, small firms could
potentially save a lot, say experts.
"If they had
to get that expensive money back then, most times it's beneficial for them to
refinance right now," says Jana Rouble, business development officer for SBA
& USDA loans at Fidelity Bank in Dallas and vice president of the North
Texas Association of Guaranteed Government Lenders. "The rates are really low."
A growing percentage
of institutions, including big banks, are opening the spigots. In a January
2014 report by the Office of the Comptroller of Currency, 21
percent of banks reported easing credit underwriting standards in 2013 -- bringing
that percentage close to 2006 levels -- while 79 percent of banks left requirements for borrowers
unchanged. None of the 45 banks involved in small business lending said they
had tightened requirements to get a loan.
of banks are still cautious about lending, the situation for borrowers is markedly
better than in 2012. For that year, only 9 percent of banks eased up lending
requirements, while 82 percent kept them unchanged and 9 percent actually
Even if you
don't qualify for a bank loan, if you turned to a pricier alternative lender
during the downturn you may find that it's worth shopping around for a better
deal. Growing competition among the small army of alternative lenders fighting
for a share of the market has helped some business owners sniff out better
Cambert, owner of Miami Lakes Perfumes,
a nearly 4-year-old retailer in Florida, recently refinanced a 12-month microloan
(for an amount he declined to share for publication) that he got from an
alternative lender to buy inventory. He turned to QuarterSpot, a different alternative
online lender based in New York City. QuarterSpot is charging him "less than 20
percent" interest, which is saving him a bundle over his previous rate, he says.
QuarterSpot loan was unsecured, requiring no personal guarantee, but he must
make daily repayments through an ACH debit from his business bank account. "They
were by far the most competitive, in terms of pricing," he says.
So how do
you figure out if it's time for you
to refinance now? Here are five key questions to ask yourself.
1. How competitive are the terms of your
current loam? "In
this environment, taking a look at the interest rate is the obvious starting
point," says Jim Holtzman, a CPA and certified financial planner at Legend
Financial Advisors in Pittsburgh. Generally, banks and credit unions will
offer the lowest interest rates.
fixed-rate SBA loans for working capital, the rate currently ranges between 5.5
and 6 percent, depending on the loan maturity date. If you have borrowed a
significant amount of money on credit cards, you could cut your overhead by
getting a bank loan and using it to pay down those balances. The current average APR for small business credit cards is 12.98 percent.
who turned, in desperation, to a very-high-interest alternative lender, it's
also worth shopping around -- even if your credit isn't perfect. For some
small-business borrowers, peer-to-peer loans may be cheaper. The average
interest rate on Lending Club's small business loans in 2012 was 13.39 percent,
according to a 2014 study by The Federal Reserve Board. Prosper, another
big player in this space, also offers business loans and publishes
its interest rates, which are tied to borrowers' credit profiles.
2. How much interest do you have left to
pay? If you're nearing
the end of an amortized loan -- where interest dominates early
payments, principal the later ones -- refinancing may not improve your financial situation.
Rouble recently heard from a dentist who
had already paid a bank loan for 10 years and was at the point where he was
paying only principal. "It might not make sense to refinance that debt as opposed
to other debts," she says. Even if the rate is high, by the time you're nearly done with the loan, it's a sunk cost: You've already paid the bulk of the interest, and most dollars are going toward retiring the loan's principal.
3. What are the costs of getting a new
loan? Fees and
ancillary costs could wipe out any savings you'll get from refinancing, so do
the math. Although there are no fees
on SBA loans of less than $150,000, larger loans cost more.
loans of $150,000 to $700,000, fees are 3 percent of the SBA-guaranteed portion;
fees rise to 3.5 percent for loans of more than $700,000.
If you will
be using commercial real estate as collateral for your loan, you also need to
factor in the cost of an appraisal, which Rouble estimates at about $2,500.
4. Do you have a strong financial
aren't likely to throw out the welcome mat if either you or the business has
poor credit. However, there is a program that can help you if your credit score
has been scarred -- the SBA
Advantage program. It uses an alternative scoring system to
evaluate the businesses, and if a borrower is approved, the SBA will guarantee
her bank is on the verge of closing an SBA Advantage loan worth $350,0000 for a
doctor with a past bankruptcy.
5. What is your tolerance for paperwork?
To get an SBA-backed
loan, you'll need to prepare a phone-book-size
pile of documents, including three years of tax returns and one year of
bank statements for both you and the business, and financial statements from
that is beyond the capabilities of the business owner, who is just busy, and
doesn't want to pay for the accounting," says Brendan Ross, president of Direct
Lending Investments, the general partner of a short-term, high-yield small
business loan fund. It could be that you'd be better off investing your time
and money in something else -- such as winning profitable new customers.
See related: Landing and maintaining an unsecured line of credit for your business
, Landing and maintaining an unsecured line of credit for your business
Published: March 12, 2014
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