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Does it make sense to refinance business credit card debt?

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Your Business Credit
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Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.

Ask Elaine a question or read her prior answers in the 'Your Business Credit' archive.

Question for the CreditCards.com expert Dear Your Business Credit,
I run a small restaurant and have around $20,000 in credit card debt. I'm paying close to 13 percent interest. Is it worth it to try to get a bank loan to refinance my debt? From what I understand, I may get a better interest rate. The restaurant is doing well. -- Suzanne

Answer for the CreditCards.com expert Dear Suzanne,
This is a great question to be asking right now. Recently, I have been hearing from more business consultants and experts who are advising businesses with good credit to go after bank loans while interest rates are low.

It's possible that you could save a great deal by refinancing your debt. Currently, the U.S. Small Business Administration says the interest rate for fixed-rate 7(a) loans under $25,000 cannot exceed the base rate plus 4.25 percent if they are due in less than seven years or 4.75 percent if they are due in seven years or more. One of the three base rates that can be used is the prime rate published in a daily national newspaper. Currently, the Wall Street Journal's prime rate is 3.25 percent, meaning interest on a fixed rate SBA-backed loan this size can't exceed 8 percent.

However, a couple of recent surveys I've seen, including the SBA's 2012 look at small business lending in the United States, suggest that entrepreneurs seeking larger loans are faring better than those going after deals under $100,000. It's not entirely surprising. Business loans often require a lot of paperwork, so banks tend to gravitate to larger deals where all that effort will pay off in greater profits.

My suggestion is to talk to a loan officer at the bank where you do your business banking to find out if it is worthwhile for you to apply for a loan. A loan officer will generally be able to share the typical size deals the bank does, and the types of loans it makes. Some banks gravitate to asset-based loans, while others may want you to sign a personal guarantee, so if you have a preference, it is worth asking about that.

If you decide to go after a loan, it may take some time to prepare the necessary documents. The SBA publishes useful checklists for those seeking an SBA-guaranteed loan or other types of business loans.

That said, you may not have to go through the paperwork to get a bank loan if you can get a better credit card deal. Your interest rate of 13 percent is just about average for business credit cards right now, according to CreditCards.com weekly rate report.  However, there are a number of credit cards currently offering introductory rates, some with 0 percent interest for a set period of time. Securing one of these deals could help you save quite a bit on interest, depending on how long the teaser rate lasts.

You didn't mention your credit score, but whatever it is will affect your ability to get the best rates. Paying down your debt as much as you can before you go after a loan, whether from a bank or on your credit cards, should help you improve your credit score, if it isn't as high as you would like. I would recommend doing that as long as you have adequate cash flow. A higher credit score will generally help you get a better interest rate on debts you take out.

If you have been borrowing because of poor cash flow, you might try negotiating better deals with your suppliers. For instance, a vendor who provides you with ingredients you use at the restaurant may be willing to extend the time in which you can make a payment without penalty. Having a little extra time to pay the bills can help you run a far more efficient operation.

Regardless of what method of refinancing you choose, don't give up if you can't find the interest rate you want at first. Sometimes it requires digging, whether you want a bank loan or a credit card deal. Being prepared for that will keep you from getting discouraged if your first efforts don't pay off.

See related: 2013 survey of balance transfer offers, How to improve your chances of getting an SBA loan

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Published: July 29, 2013


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Credit Card Rate Report

Updated: 08-28-2014

National Average 15.06%
Low Interest 10.37%
Balance Transfer 12.73%
Business 12.80%
Student 13.27%
Cash Back 14.94%
Reward 15.04%
Airline 15.46%
Bad Credit 22.73%
Instant Approval 28.00%

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