How to Switch Business Lenders: Refinancing Step by Step

Refinancing replaces your current business loan with a new one, ideally with better terms. Done right, refinancing can lower your rate, reduce payments, or improve your overall financing structure.

This guide walks you through the complete refinancing process.

When Refinancing Makes Sense

Consider refinancing when:

• Interest rates have dropped: Market rates are lower than your current rate
• Your creditworthiness improved: Better credit qualifies for better terms
• Business has grown: Stronger financials support better offers
• Current terms are unfavorable: High rates, restrictive covenants
• Payment strain: Need to extend term for lower payments
• Consolidating multiple loans: Simplify into single payment

Step 1: Analyze Your Current Loan

Before refinancing, understand what you have:

Step 2: Calculate Breakeven

Refinancing has costs. Calculate when savings exceed costs:

• Total refinancing costs: Origination fees, legal fees, etc.
• Monthly savings: Old payment minus new payment
• Breakeven point: Total costs / monthly savings
• Example: $5,000 costs / $400 monthly savings = 12.5 months

Step 3: Shop for Better Terms

Compare options from multiple lenders:

• Current lender: Ask if they will improve terms to keep your business
• Other banks: Local banks and credit unions
• SBA lenders: If currently in non-SBA loan, SBA may offer better terms
• Online lenders: Quick applications, competitive for some profiles
• Loan brokers: Can shop multiple lenders on your behalf

Step 4: Gather Documentation

Prepare standard loan application documents:

• Tax returns: Three years personal and business
• Financial statements: Current P&L and balance sheet
• Bank statements: Six to twelve months
• Existing loan documents: Note, security agreement, payoff letter
• Personal financial statement: Updated net worth and assets
• Business plan: If significant changes since original loan

Step 5: Request Payoff Letter

Get exact payoff amount from current lender:

• Request in writing: Ask for payoff good through specific date
• Include per diem: Daily interest accrual after payoff date
• Identify all fees: Ensure prepayment penalty is clearly stated
• Confirm wire instructions: Where new lender sends payoff funds

Step 6: Compare Total Cost

Complete cost comparison:

Step 7: Apply and Underwrite

The new loan goes through standard underwriting:

• Submit application and documents: Complete package to new lender
• Credit and background checks: Standard verification process
• Collateral evaluation: New lender assesses collateral
• Approval and conditions: Receive approval with conditions
• Lock rate if applicable: Secure your rate before closing

Step 8: Coordinate Closing

Careful coordination ensures smooth transition:

• Schedule both closings: New loan funds, old loan pays off same day
• Title work: Ensure old liens are released, new liens recorded
• UCC filings: New lender files, old lender releases
• Direct payoff: New lender wires directly to old lender
• Retain documentation: Keep all payoff confirmations

Common Refinancing Challenges

Be prepared for these issues:

• Prepayment penalty disputes: Verify calculation with current lender
• Collateral release delays: UCC termination can take time
• Second lien issues: Subordinate debt may complicate process
• Rate lock expiration: Delays can cause rate to increase
• Covenant violations: Current loan may restrict refinancing

When Not to Refinance

Refinancing may not make sense when:

• Prepayment penalty exceeds savings: Math does not work
• Remaining term is short: Not enough time to recoup costs
• Credit has declined: May not qualify for better terms
• Business is struggling: Underwriting will be difficult
• Planning to sell business: May not hold loan long enough