Time to Refinance Small-Business Debt? 5 Questions to Ask

Many 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.

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With loans from the U.S. Small Business Administration available for less than 6% 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% of banks reported easing credit underwriting standards in 2013 -- bringing that percentage close to 2006 levels -- while 79%  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.

While plenty of banks are still cautious about lending, the situation for borrowers is markedly better than in 2012. For that year, only 9% of banks eased up lending requirements, while 82% kept them unchanged and 9% actually tightened them.

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 deals.

John 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%" interest, which is saving him a bundle over his previous rate, he says.

The 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.

For fixed-rate SBA loans for working capital, the rate currently ranges between 5.5 and 6%, 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%.

For those 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%, 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.

For SBA loans of $150,000 to $700,000, fees are 3% of the SBA-guaranteed portion; fees rise to 3.5% 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 profile? Banks 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 the loan.

Rouble says 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 the business.

"Sometimes, 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