As an accountant with small business clients, making the move to becoming a most trusted advisor means helping those clients run their businesses as cost-effectively as possible. This includes advising them on how to make responsible choices when it comes to business financing. If a client has crossed an important fiscal threshold since the last time they secured financing it may be time for them to consider loan refinancing—a strategy for reducing the overall cost of their loans.
Important milestones include reaching two years in business, significantly increasing their annual revenue, or improving their credit score. If a client has met any of these critical milestones, it may be time for them to explore refinancing options.
What Smart Loan Refinancing Looks Like
Put in the simplest possible terms, loan refinancing means using one loan to pay off another. If that sounds risky, your instincts aren’t entirely off the mark—but we’re not talking about your client taking out the same loan twice and hoping for better luck this time. The loan they use to refinance their existing debt should be more affordable in some way: greater value, a longer repayment term, a lower interest rate, or some combination of these factors.
SBA loans are an extremely desirable refinancing option for small business owners. These loans come with long terms and exceptionally low-interest rates. (They are also, unfortunately, very competitive for the same reasons described above.)
Refinancing could mean debt consolidation if the client is refinancing more than one loan. This type of refinancing establishes a more regular payment schedule and can even out their cash flow.
Smart loan refinancing means knowing in advance if your client is facing a prepayment penalty on that first loan, and moving forward accordingly. Refinancing often means paying off an original loan early, which you only want to advise your client to do if the value they will get from refinancing outweighs their lender’s prepayment fees.
What Risky Loan Refinancing Looks Like
Generally speaking, smart loan refinancing is not taking out another expensive emergency loan to pay for their first expensive emergency loan. Taking out a loan so similar to their existing one may provide some short-term relief but is not a long-term solution.
Taking out a new emergency loan often means your client will pay interest on the interest they are already accruing on their first loan. This kind of borrowing can lock the client into a dangerous cycle of debt and weaken the business they have worked so hard to build. If your client is examining their refinancing options, advise them to be wary of loans that are too similar to those they already have in terms of interest, term, etc. Remind them that their new loan should be an improvement upon their old one in some way.
How Refinancing Can Help a Business
Refinancing could be just what your small business client needs to take serious strides in the coming year. Help them to think through whether they have experienced any of the scenarios or challenges described below.
- Are hefty loan payments cutting into their cash flow? Refinancing with a longer-term loan can (literally) buy your client time and shave down that monthly payment. They will get to hold on to more cash each month and pay off their debt on a more comfortable timeline.
- Are they still under the thumb of that pricey short-term loan or merchant cash advance they took out when times were tough? A loan with a lower interest rate can lessen the strain. Their refinancing loan helps cover their current loan payments while accruing less interest, meaning their borrowed money costs less over time.
- Is there a reasonable concern that the client is not growing fast enough, even with their current financing? Perhaps their business was young when they first applied, or their credit was less than stellar, or they weren’t collecting as much in revenue, and only qualified for smaller loans. Refinancing means more capital on-hand, and more capital means more resources for growth. Your client will be able to take bigger risks, effect more lasting change, grow their team faster, and nurture those roots their business needs to survive long-term.
Is It Time to Start Refinancing?
If there’s room for improvement with their current debt repayment plan, your client may be eligible to refinance. This may also kick off their business’s “graduation” to bigger and better loans. Refinancing will deepen their borrowing history and (ideally) set them on a path to increase revenue and improve their credit, which will only help make them a stronger applicant the next time they apply for financing. They’ll be shoring up their more immediate cash flow needs while laying the groundwork for a bright future for their business.
And by providing them with sound advice on how to use loan refinancing, tailored to their business situation and history, you will be enhancing your role as the most trusted advisor to your clients.