Business loans provide you with financial aid to expand your venture and meet your day-to-day expenses. Once you get the business loan, it becomes a routine for you to pay off your EMIs, and you will not think about altering its terms and using it in a better way. But if you are prudent enough, you might consider taking another loan with the same lender or transferring the loan to another one. While doing so, you can make the terms of your loan more feasible.This process is called loan refinancing.

While refinancing a loan, you can 

  • Go in for a shorter or longer tenure
  • Opt for lower interest rates
  • Boost your credit score
  • Lower your monthly EMIs

Here are a few types of loans that you can refinance

  • Asset-based term loans
  • Unsecured term loans
  • Commercial vehicle loans
  • Equipment financing
  • Startup loans
  • Working capital loans

So, when is the right time to refinance a business loan, when is it not ideal, and what are the steps involved in refinancing? 

When is the Correct Time To Refinance?

If you have improved your credit score or are making profits in your business, you can consider refinancing your business loan. Loan approval will be based on your credit score only, and the higher it is the better your chances of gaining the approval. Some scenarios in which you can consider loan refinancing are as follows.

  • Achieving a major business breakthrough may open you up to new business opportunities. Your profits and revenue will increase. In this case, you should consider refinancing.
  •  If the financial situation of your business has improved - When you start your business, it will be difficult to procure loans, since it will be hard for lenders to say how you are going to manage the flow of cash into your business and whether your business will succeed. But, once your finances have improved (more revenue, good profits, better credit score, etc), it is a positive signal for lenders, and it changes your loan eligibility. At this point of time, you should consider refinancing as it can make the terms of your high start-up loan more flexible.
  • Sometimes, if you were not able to qualify for a single big loan, then you would have taken smaller loans and put them together for funding your business. They may all have high-interest rates, and all these added together will be a huge amount. In this case, you can consider refinancing to take a single and more manageable loan. 
  • If you have multiple business loans with different repayment schedules, then you must consider making them into a single loan in order to avoid frequent repayments. In this case, it is advisable to go for refinancing.

When Should You Avoid Refinancing?

  • If your calculations indicate that refinancing a business loan will actually increase the cost of your debt, then it is not a feasible option.
  • If your credit scores are weak, then you may not be eligible for loans with better terms. Additionally, applying for a new loan will only hurt your credit score further. Thus, before applying for refinancing, you should consider improving your credit score
  • It may not be worth refinancing your loan if you have only one existing loan currently.

Step by Step Guide to Refinance a Business Loan

1: You Should Determine Why You Want to Refinance Your Current Loan 

You should determine your refinancing goals. Some common objectives for refinancing are lower interest rates, lower EMIs, and feasible repayment tenures. Also take into consideration other factors, such as processing fees when applying for a new loan and the amount charged when prepaying the current loan. 

 2: You Should Check If You are Eligible for Loan Refinancing 

In India, the credit score determines whether a person is eligible for a loan. It determines the creditworthiness of the individual and it is primarily obtained from a credit report generated by credit bureaus. Generally, the credit score lies between 300 and 900, and higher the credit score, higher are the possibilities for the individual to procure the loan. So, make sure that you have a good credit score before you get into refinancing your loan. Also, you should have a definitive repayment plan when refinancing and make sure that you do not default (which will hurt your credit score). 

3: You Must Have Your Documents in Place 

To obtain the best rates for loan refinancing, you must have certain requisites, which you can show through the following documents

  • Profit-and-loss statements
  • Tax returns
  • Bank statements
  • Balance sheets

These are the documents that will also help you evaluate the type of refinancing that will be appropriate for you. If you are unsure whether you will be eligible or not, you can check with some moneylenders.

 4.  You Must Select the Right Lender 

When you go in for business loan refinancing, you can get a loan with the same lender or choose a new one. To get the best outcomes from refinancing, you should analyze and compare processing charges, interest rates, repayment tenures, collateral, lender reputation, and loan terms across different lenders. The lending institution that you have got your existing loan from may be one of the best, and you could approach the same one for refinancing. When you want to approach a new lender, you should select one that allows you to check if you prequalify for financing. A soft enquiry is made by the lender to check if you prequalify, and this will not affect your credit report. 

5. Submit Your Application 

After you have chosen which lender and loan type you will apply for, you will have to get a number of required documents ready. This is when all of that paperwork you did when evaluating your business’s financial health will be useful. The process of applying for business loan refinancing is quite simple. Often minimal documentation is required, such as photo identity proof, bank statements, and some kind of business proof. The approval will be quick, and you do not have to wait for a long time.  


While refinancing is advantageous, you should consider if it is the right situation and prudently refinance a business loan. 

FAQS  How to Refinance a Business Loan

1:What are some advantages of refinancing my business loan?

You can lower the interest rates or alter the repayment tenures. You can make the loan terms more flexible.

2: Will refinancing your business loan hurt your credit score?

Taking a new loan will hurt your credit score generally because you are adding to your debt. But refinancing is the process of substituting your existing loan with a new one with feasible interest rates, suitable repayment tenures, and better loan terms. So, it will affect your credit score minimally.