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Small business owners who have been around for a while know the value of affordable financing, including small business loans with generous terms. Financing helps growing businesses flourish, and can act as a lifeline for businesses temporarily experiencing a cash flow crunch.
A good loan, however, can be hard to find—especially for small businesses, which are seen as a riskier bet for banks and lenders. If you have less-than-stellar credit, your options for a good loan shrink further.
If you apply for a business loan and receive an offer well below what you were looking for, all is not lost. A loan renewal could be a good compromise—and even a less expensive option for you in the long run.
Let’s go over the finer points of loan renewals, and explain why going this route can be a smart choice for business owners.
What Is A Loan Renewal?
With a loan renewal, you take out a loan with a small business lender, and after you’ve finished paying it off, you take out another one. But why is this notable?
Let’s say your small business needs $100,000. You’ve identified this amount as what you need to upgrade your current equipment, or to renovate your existing brick-and-mortar location. Unfortunately, your best offer comes in from a lender at just $50,000, due to your short time in business.
Agreeing to take that $50,000 loan can work in your favor if the option to renew the loan—assuming you meet the lender’s criteria—is available once you pay off that first $50,000.
At this point, you’ve developed a relationship with your lender. They know you, they know your business, and most importantly of all, they know you can repay a loan for $50,000, if not more. Now you can explore a loan renewal, and see if your lender will not only be willing to loan you that remaining $50,000 you need, but at a lower rate than before.
What Are The Benefits Of Renewing Your Loan?
Upfront, the most obvious benefit of a loan renewal is that it helps you acquire all of the funding you previously needed. If you wanted a loan for $100,000, but could only qualify for half of that, being responsible with your payments helps you get the full amount—eventually.
There are less obvious benefits to this concept as well. For example, let’s say you wanted that $100,000, but your funding needs weren’t dire. You wanted the money to upgrade your equipment, but the need isn’t pressing for every piece of equipment, and you can get along by funding half of what you needed now.
For one thing, you no longer need to pay back interest on a $100,000 loan in six months. You just pay back interest on a $50,000 loan in that time frame.
Also, at the time of your loan renewal, you may be eligible for a better rate and more generous repayment terms than you were the first time around, thanks to your diligent and responsible payments. You may also have come into more collateral, or your business’s finances may have improved.
Now, your renewed loan will cost you less money than what you might have paid had you been approved for the full amount upfront. If you don’t need all of your money upfront, a loan renewal can make a lot of sense for your business.
What Do You Have To Watch Out For?
Something to keep in mind when considering a loan renewal: Now that you’ve improved your credit score and made yourself eligible for better loan options, you don’t have to settle for the lender that first lent to you. You can, and should, explore your options on the market.
Your lender might offer you a renewal opportunity and try to lock you in at the same rates you had the first time around, or with only slight improvements. You may be able to find competitive interest rates with another lender, so take your needs back to other lenders now that your situation has changed.
Another potential complication comes from taking on a loan with a balloon payment, or bullet payment, at the end. These are short-term loans with interest-only payments throughout the life of the loan until maturity, at which point you’ll have to either renew the loan or pay the entire principle of the loan all at once.
This can be a tricky gamble. On one hand, these loans keep monthly payments low, and a renewal can help you turn this loan into a more affordable, longer-term loan.
A renewal, however, is never guaranteed. A lender could refuse to renew your loan for any number of reasons—and then you’ll be staring at a large payment that you need to pay off that you might not have expected to have.
How To Make Yourself A Candidate For Loan Renewal
A loan renewal is no sure thing, but it’s a fairly common practice in the small business lending world. In order to make yourself more likely to get approved for a loan renewal at a better rate, be sure to take the following steps while paying off your original loan:
- Make your loan payments in a timely manner.
- Add to your bank balance whenever possible to improve your average bank balance.
- Keep an eye on your credit score and report and make sure no errors or mistakes are added to your accounts—and correcting the record when they are.
- Pay all of your business-related bills, such as utility bills and rent, on time.
- Keep your credit utilization ratio as low as possible by paying off debts on your business credit cards and other lines of credit early.
Not only will these practices make you more eligible for a renewal, they’re also good business practices in general, which will serve you well in the long run.
A loan renewal is an excellent opportunity for small businesses to get the funding they want at rates not previously available to them. That’s why getting an offer for a loan less than what you want isn’t a deal breaker—and in fact, can actually work in your favor. Explore your lending options and see if your potential lenders offer such an option before moving ahead.
April 3, 2019 at 02:42PM
Forbes – Entrepreneurs