Reasons to refinance your commercial loan

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Ask a Lender
October 31, 2017 | Updated November 1, 2017


Key Points

Reasons to refinance a commercial loan

  • Better rates and terms
  • Pay off balloon payments
  • Generate cash 

Just like home loans, commercial loans can be refinanced, but the process tends to be trickier than a home loan refinance.  Here are some of the primary reasons that companies refinance their commercial loans.

Better rates and terms

Just like with home loans, commercial loans can come either with a fixed rate or an adjustable rate. One of the major reasons to refinance is to move into a fixed rate with a longer term. There are advantages to this. One is that with a fixed rate, the debt cost to your business will be more stable and predictable, where adjustable rates vary and can be difficult to predict.

With a refinance, the owner can sometimes obtain a lower interest rate, as well, which also can save significant amounts of money over the length of the loan.

Commercial loans on newly acquired buildings often carry higher interest rates. These loans, often referred to as bridge loans, are meant to be temporary, and are usually converted into a permanent loan within a couple of years. Owners often look to refinance the terms into a longer term, more stable rates that better reflect the underlying risk of the property.

Pay off balloon payments

In some cases, a building owner has little choice but to refinance. Many commercial loans are structured to include balloon payments. Balloon loans can make sense to an owner who wants to defer some debt costs, as these loans pay off at a slower rate, so the monthly payments tend to be lower. When the balloon loan matures, however, there is usually a large balance to be paid within a short timeframe. The most common way to pay off that balance is through refinancing.

Generate cash

Another major reason to refinance is to cash out a portion of the property’s equity. A commercial asset, such as an office building, a retail store or warehouse, has value based on the physical property, and ability to generate revenue for a business. This value can increase over time. Just like with home, it is possible for the owner to tap that money to make updates or repairs to the building, consolidate business debts, purchase machinery, and so on. 

In tapping the equity, though, borrowers may face some restrictions. Lenders, for example, tend to frown on using a cash-out refinancing as a strategy to cover a company’s net operating losses. Owners and real estate speculators have often used cash-out refinancing as a way to acquire other properties, however. 

Challenges in refinancing commercial loans

One additional point should be made about commercial refinancing. It tends to be a more time consuming and difficult process than refinancing a home loan. The underwriting process is more complicated, as lenders evaluate both the value of the property and its ability to generate cash. Commercial loans also tend to carry high prepayment penalties.

Typically, you can only avoid these charges by refinancing an existing commercial loan within a window just before the loan matures.

There are alternative options to a traditional refinance, but these too can be expensive and complicated. If you are considering a refinance, you should thoroughly investigate the costs involved in refinancing and balance those against any potential savings.

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