Business Debt Refinance

There are many advantages to restructuring your business debt. Entrepreneurs want to take advantage of lower interest rates which reduce the cost of their loans and improve business cash flow. Depending on your business, refinancing your debt could be the difference between a healthy and an unhealthy company. Debt is often necessary for business expansion and growth. A certain amount of debt is not considered unhealthy by lenders; however, significant debt or carrying debt in the wrong places will send a red flag to your lender.

Before you begin looking to refinance your existing business loans make sure you know what prepayment penalties you have on your existing loans. Take the time to request a payoff quote. Often other prepayment penalties exist that are not very clear in your loan documents. Many lenders do not take the time to help you understand the details around prepayment penalties.

Be aware that fixed interest rates usually carry prepayment penalties. If you have a fixed rate look for something called a “derivative.” The derivative could be referenced to as a swap, spur, or collar. These are tools lenders will use to hedge the bank’s interest rate risk and fix the interest rate for your loan.  A maintenance yield risk will exist with any derivative attached to your loan. It is this maintenance yield that causes an additional prepayment penalty to your loan. In some cases I have seen this maintenance yield risk be an additional 10%-15% of the loan amount. Most lenders will pass this on to you as a prepayment penalty when you refinance your debt.

Depending on the loan amount and the savings you’ll realize from refinancing, a prepayment penalty could make or break your desire to refinance. A payoff quote will save you and the lender an unexpected surprise as you near loan closing.

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