As your small business begins to grow and expand, you may find that your original small business loan is not enough to fund your needs. To ensure that you can continue to keep up with customer demand, consider these four options: refinancing your existing small business loan, restructuring an SBA loan, extending your business line of credit or taking out a new small business loan. While there are benefits to each financing option, you should examine how you plan to use the new financing and how to best match the repayment terms to your anticipated cash flow.
How to refinance with an SBA loan
SBA loans aren’t just for new debt. They can also be used to consolidate previously incurred debt as a refinance. One of the benefits of these loans is that they are made by participating lenders, but are guaranteed up to 85 percent by the SBA. However, in order to refinance with an SBA loan you must be in good standing with your current debt payments, and be able to show that the refinancing would provide a substantial benefit to your business. The SBA considers this to be a 20 percent increase in your cash flow. This could come from extending payments or altering the interest rate to subsequently reduce monthly payment amounts.
Adjusting the terms of an existing SBA loan
It is rare for the SBA to guarantee the refinance of a loan that they already guaranteed. If you need to adjust an existing SBA loan, you should work with your lender and the SBA to devise a new payment structure or interest rate that better meets your current needs.
Extending a credit line to manage working capital
If you have a business line of credit that is about to mature, speak to your lender about getting an extension. This will ensure you have the funds you need to manage inventory and other working capital needs to keep up with demand. “Terming out” allows you to stretch your payments or increase your line of credit, therefore increasing working capital availability longer than originally planned. The Small Business Administration (SBA) typically looks for a significant growth justification to increase a business line of credit or SBA loan.
When to choose a new small business loan
Refinancing may help you improve working capital, but when you have to make a major purchase, such as land, a new building or new equipment, consider taking out a new small business loan. This new loan will allow you to continue making payments on your previous loan, paying it off as you had planned, and allow you to receive the SBA loan guarantee. Use a business loan calculator to determine if you can support additional debt. Then speak to your lender to find out which loan structure works for you.
How small business loans can help you grow
Increasing your working capital capacity with a small business loan allows you to continue growing your business and vie for contracts you would otherwise not have the resources to obtain. While this article has discussed the SBA’s involvement in refinancing and increasing the capacity of your existing loans, your lender may have other requirements. For example, to support your growing business, you may be required to pledge more collateral for a second small business loan, which could take the form of accounts receivable and inventory, or long-term assets like buildings and machinery. Use the SBA’s 20 percent rule to weigh the costs and benefits of additional financing before you expand. If a small business loan or refinance will provide you with substantial room to grow, now may be the right time to expand.
Sponsored content was created and provided by RBS Citizens Financial Group.