Working Capital Loan Refinancing
For small businesses trying to deal with reduced cash flow and sales, the process of commercial loan refinancing has become much more relevant. In some cases commercial borrowers are attempting to secure additional cash, and in other situations they are being forced to refinance an existing loan by the current lender. Refinancing difficulties are currently occurring with both short-term commercial funding and long-term commercial real estate loans.
There are some business finance circumstances that will be harder to refinance. There are two scenarios that are particularly difficult to refinance, one involving SBA loans and the other business opportunity financing. The need to replace existing business lines of credit with new financing arrangements is now emerging as equally difficult.
Revising commercial real estate financing in which there is business property serving as collateral is a more traditional form of refinancing. Because many banks have decided to stop making commercial loans, some borrowers will need to refinance simply to replace their existing commercial mortgage. Small business owners are being forced to explore refinancing options in order to get capital from their business equity to support their business financing needs in a slow economy. In either case, business borrowers are increasingly discovering that commercial refinancing is not as straightforward as it might have been in the past. In particular, there are two problem areas that will often be hard to overcome.
Business valuation is one factor acting as an obstacle to smooth refinancing. Because commercial appraisals typically derive most business value from an income approach, a declining sales level leads to reduced commercial property values. A second key problem impacting business loan refinancing is the lack of recent business profits. Many merchants are showing losses on recent tax returns and financial statements because of financial fluctuations. Because lenders look at cash flow to see if it is sufficient to cover debt payments, recent losses are likely to be a significant difficulty when attempting to refinance commercial mortgages and other commercial loans.
Borrowers should find themselves in better shape if they realize in advance that there might not be the usual choices for business refinancing. It is likely that most businesses will need to evaluate and consider both new commercial lending sources and new business financing programs before the end of their current efforts to refinance business debt.
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