Small Business Financing

by Stephen A. Bush

The process of refinancing small business loans has become more relevant to businesses which are trying to deal with reduced sales and cash flow. In some situations business owners are being forced to refinance existing loans by current lenders, and in other cases they are attempting to secure additional cash. Refinancing difficulties are currently occurring with both short-term commercial funding and long-term commercial real estate loans.

Some small business financing situations lend themselves better to refinancing than others. SBA financing and business opportunity loans are two scenarios that are especially difficult to refinance. Funeral home mortgages are frequently difficult for a variety of reasons, and business refinancing of funeral home business loans is particularly tough in the current financial environment. A fourth example is now emerging as equally difficult, and this involves the need to replace an existing business line of credit with new financing arrangements.

A more traditional example of refinancing business debt is the need to revise commercial real estate loans in which commercial property serves as collateral. Some borrowers are finding that they need to refinance simply to replace their existing commercial mortgage because many banks have decided to stop making commercial loans. Business owners are being forced to explore business refinancing options in order to get capital from their business equity to support their small business financing needs in a slow economy. As borrowers are discovering, commercial refinancing is not as straightforward as it might have been in the past for either of these cases. Two specific problem areas will be particularly challenging.

One factor proving to be an obstacle in refinancing small business loans is business valuation. Declining sales levels lead to reduced commercial property values because commercial appraisals often derive business value from the income approach. 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. Before the end of their current efforts to refinance business debt, it seems likely that most businesses will need to consider both new small business financing programs and new commercial lending sources.

Small Business Finance Programs