Business refinancing and debt consolidation, explained

Business refinancing means taking on new financing to pay off existing business debt. The goal is usually to change something about the debt: the cost, the length of the term, the size or frequency of payments, or the type of financing.

Debt consolidation is a kind of refinancing. Instead of replacing one debt, it pays off several, for example a few short-term loans, equipment balances or merchant cash advances, and replaces them with a single obligation and a single payment schedule.

Refinancing does not erase debt. The amount owed moves to a new lender, often with new fees added. Whether it helps depends on how the new terms compare with the old ones over the whole life of the debt.

The basic steps are similar across banks, credit unions, online lenders and SBA lenders, though the paperwork varies:

1. List every debt to be refinanced, with its current balance, payment, payment frequency, remaining term and any prepayment terms.
2. Request a payoff letter from each current lender or provider, showing the exact amount needed to close the account by a given date.
3. Apply with the new lender, which reviews payment history on the current debts, financial statements, credit and any collateral.
4. If approved, the new lender pays the old debts, ideally directly, so the money does not pass through the business’s account.
5. Confirm that each old account shows as paid and that any liens, such as UCC filings, are released.

Some existing agreements require the old lender’s consent, or include terms about other liens on the same collateral. Reading the current contracts before applying can prevent surprises.

The SBA says its 7(a) loans (opens in a new tab) and 504 loans (opens in a new tab) can be used to refinance eligible business debt. SBA refinancing has its own eligibility tests, which change over time, so check the SBA pages and ask an SBA lender for current rules. If the debt is commercial real estate coming due, our maturity refinance page covers that situation.

• Consolidating high-cost short-term debt into a longer-term loan.
• Lowering the regular payment to ease cash flow.
• Extending the term of a debt that is hard to keep up with.
• Moving from daily or weekly debits to monthly payments.
• Replacing a variable-rate loan with a fixed-rate loan, or the other way around.
• Taking cash out of equity in business real estate.

A common reason is the payment schedule itself. Some short-term financing collects payments every business day. Switching to a monthly schedule can make cash flow easier to plan, even when the total cost is similar. Our cash flow guide explains how timing shapes a business’s cash.

• Statements and payment history for each debt being refinanced.
• Business financial statements, bank statements and tax returns.
• Personal credit, business credit, or both.
• Information about collateral, and any existing liens on it.
• Payoff letters from current lenders.

A history of on-time payments on the current debt is often part of the review. Lenders vary in how they weigh each item, and SBA lenders apply SBA program rules on top of their own.

The most common mistake in refinancing is comparing only monthly payments. A smaller payment spread over a much longer term can cost more in total. To compare fairly, look at:

• The total amount still owed on the current debts if you keep them, including remaining interest or fees.
• The total amount you would repay on the new loan over its full term.
• Origination, closing and other fees on the new loan.
• Prepayment penalties or early payoff terms on the old debts.
• Any new collateral or personal guaranty the new lender asks for.
• Whether the new rate is fixed or variable.

• “Debt relief” or settlement firms that charge upfront fees to negotiate with merchant cash advance providers or lenders.
• A “refinance” that is really a new merchant cash advance used to pay off old ones, adding cost instead of reducing it.
• An offer that pays some debts but leaves others in place without saying so.
• Pressure to sign before you have the total repayment amount in writing.
• A lender that will not pay old creditors directly or explain how liens will be released.

Find a counselor through the SBA’s resource partners page (opens in a new tab).

1. What is the total cost of the new loan compared with what I would pay on my current debts?
2. Are there prepayment penalties on my current debts, and are they included in the payoff amount?
3. What fees are charged on the new loan, and are they deducted from the proceeds?
4. Will you pay each old creditor directly?
5. What liens will you file, and on what collateral?
6. Is the rate fixed or variable, and what is the payment schedule?

The Federal Reserve’s Small Business Credit Survey (opens in a new tab) reports on how small businesses use and seek financing, and the SBA’s loans overview (opens in a new tab) describes its programs. You may also want to read about SBA loans and working capital loans.