How Can You Refinance An Existing Commercial Loan?

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Refinancing a commercial loan means getting a new loan to replace an old one. This is done to lower payments, change loan terms, or get access to money for improvements. Always check the plus and minus points, costs, and requirements beforehand. Commercial property can be any building or land used for business purposes. It includes places like offices, factories, shops, and apartments with five or more units. The process of refinancing commercial real estate is much like refinancing a home. You get a new loan to pay off the old one, aiming for better conditions.

Key Takeaways

  • Refinancing a commercial loan can help lower monthly payments, obtain more favorable loan terms, or access the property’s equity.
  • The refinancing process involves replacing an existing commercial mortgage with a new loan, often to secure better terms.
  • Lenders consider factors like credit score, net operating income, debt service coverage ratio, and operating history when evaluating refinancing eligibility.
  • Refinancing comes with upfront costs, such as prepayment penalties, guaranty fees, credit check fees, and application fees.
  • Commercial cash-out refinancing allows investors to access the equity in their properties, providing liquidity for business needs.

Understanding Commercial Loan Refinancing

Commercial loan refinancing is when you get a new loan to replace the old one. People do this to get better loan terms. That could mean a lower interest rate, a change in loan type, or a shorter time to pay it back. This is a decision that business owners and real estate investors make after looking at the good and bad points of refinancing.

What is Commercial Loan Refinancing?

Commercial loan refinancing is about getting a fresh commercial real estate loan to clear an old mortgage. There are many reasons to do this, like getting money out of the property’s equity or dodging a big payment. It’s quite alike to how people refinance their homes. The new loan just takes the place of the old one.

Benefits of Refinancing Commercial Loans

The good side of refinancing includes lowering what you pay each month and getting better loan terms. It can also help you avoid big one-time payments and use the commercial property’s equity to get cash. A lower interest rate or a new loan type can help your finances. You can match your financing to your work or investment plans better.

Drawbacks of Refinancing Commercial Loans

There are also downsides to refinancing. It can cost a lot upfront, with things like prepayment penalties and various fees. Application fees, guaranty fees, and credit check fees can hit your pocket hard. Plus, lenders might not let you refinance certain commercial loans. And sometimes the new loan isn’t as good as the first one.

Types of Commercial Refinance Loans

Commercial Refinance Loans

Commercial loan refinancing has several options, each with unique features. The main types include government-backed, conventional, and cash-out refinance loans.

Government-Backed Refinance Loans

Government-backed loans from the SBA and USDA are easier to get. They have relaxed rules because the government backs part of the loan. This helps small businesses and farms access loans.

Conventional Commercial Refinance Loans

Banks or lenders usually give conventional loans. They are harder to get but can be tailored to fit your needs and goals better than government-backed loans.

Commercial Cash-Out Refinance Loans

A cash-out refinance changes your existing mortgage to get cash back. This cash can be used to grow your business, improve properties, or handle other financial needs.

It’s important to look at the benefits and what fits your situation best. Consider the loan terms, what you need, and the costs of each loan. This will help you choose wisely.

Eligibility Requirements for Refinancing

commercial property

To get your commercial loan refinanced, lenders look at your finances and the property’s success. What they find decides if and how you can refinance your loan.

Credit Score

Your business’s credit score matters a lot. It shows how reliable you are with money. A good score, like 700 or more, makes it easier to refinance loans.

Net Operating Income (NOI)

How much money the property makes, known as NOI, is very important. Lenders want to see that your property can make more than it costs. They aim for an NOI that supports a healthy DSCR, usually between 1.2 to 1.5.

Debt Service Coverage Ratio (DSCR)

Lenders also check the DSCR. It looks at how your property’s income compares to what you need for debt payments. An ideal DSCR is 1.2 to 1.5, showing you can easily pay debts.

Operating History

Your experience running commercial properties matters too. They want to see a solid history of running things well for several years. This shows the property and business have a good future.

The rules for refinancing can change based on who the lender is and what loan you get. Loans from the SBA, backed by the government, are often easier to get. They might look past some of these strict rules, giving more people a chance to refinance.

Commercial Loan Refinancing Costs

Refinancing a commercial loan has several upfront costs. Borrowers need to know about these. They include prepayment penalties, guaranty fees, and credit check fees. It’s key to understand these costs to see if refinancing brings more good than the costs.

Prepayment Penalties

The SBA and other lenders may ask for prepayment penalties. This is if you pay off your existing loan early. You must consider these fees in your financial analysis.

Guaranty Fees

Government-backed commercial loans, like the SBA’s, have a guaranty fee. It’s to insure the loan. This fee can be 2% to 3.5% of the loan amount.

You need to think about it when looking at refinancing.

Credit Check Fees

As part of the refinancing application, lenders do a credit check. Borrowers usually pay for this, costing $50 to $150 or more. The amount depends on the lender and the complexity of the check.

Application Fees

Lenders might also charge an application fee. This fee covers their administrative costs. It can be $500 to $1,500 or more, depending on the lender and loan size.

All these costs can build up fast. It’s vital to calculate the possible savings from refinancing. This will help make sure the benefits are more than the costs. Thinking through these fees helps you make a smart choice about refinancing your commercial loan.

Commercial Cash-Out Refinance Explained

commercial property

A commercial cash-out refinance lets property investors tap into their commercial real estate’s equity. They do this by getting a new loan that’s bigger than their current one. The difference between the two loans is given to them in cash. This money can be used for many things like improving a property, buying new ones, paying out to investors, or covering business needs.

Benefits of Commercial Cash-Out Refinancing

commercial cash-out refinancing

Commercial cash-out refinancing is great for property investors. It lets them use their property’s equity to lower taxes. This beats selling the property outright. The cash can also help investors pay out faster or avoid big payments on adjustable-rate loans.

Reduce Tax Obligations

Investors can get money out of their properties without big tax hits. They can use this money for other business or real estate deals. Plus, they can delay paying capital gains taxes.

Distribute Returns to Investors

That cash can be given back to investors quicker. This speeds up how soon investors see their profits. It can also make the deal more attractive to new investors.

Avoid Balloon Payments

For loans that might have big payments later, a cash-out refi can be a lifesaver. It swaps the old loan for a new one, avoiding these big future bills.

Secure Lower Interest Rates

If market rates are lower now, a refinance might get you a better deal. This could save a lot of money over time on your loan payments.

Gain Liquidity and Reallocate Capital

A refinance gives borrowers cash for other business needs. They can use it for working capital, to fix properties, or to buy more real estate.

Disadvantages of Cash-Out Refinancing

commercial property

Commercial cash-out refinancing has good points but also has a few cons. The new loan’s upfront fees and closing costs can be big. These might cancel out some of the refinancing benefits. Plus, borrowers might face prepayment penalties. These penalties can make the process more expensive.

Upfront Fees and Closing Costs

Refinancing a commercial loan brings upfront fees and closing costs. These include origination, appraisal, title insurance, and legal fees. Such expenses can decrease the savings or equity you hoped to gain.

Prepayment Penalties on Current Loans

There’s also a prepayment issue with early loan payoffs. This happens if lenders like the SBA apply penalties. These penalties could be a substantial cost. It’s important when deciding to refinance.

Not All Loans Qualify

Cash-out refinancing isn’t possible for all commercial loans. Lenders set rules on which properties, loans, or borrowers qualify. These constraints mean not everyone can get a cash-out refinance.

Potential for Worse Loan Terms

Sometimes, the new loan might not have better terms. If interest rates have gone up, this could be the case. Borrowers need to check if the refinance will bring real benefits.

Commercial Loan Refinancing vs. Selling

For those with commercial real estate, there are two main choices to access property equity: refinancing or selling. When you sell your property, you get the full equity value but lose ownership. Refinancing allows the investor to keep ownership and access equity, often with better tax benefits.

The best choice between these two depends on what the investor wants to achieve. This includes how they plan to use the funds, what they aim to do with the property long-term, and the real estate market’s current state. Thinking about these factors helps investors make the best decision for their properties.

Refinancing Selling
Retains ownership of the property Relinquishes ownership of the property
Provides access to property equity with potentially more favorable tax implications Allows the investor to capture the full equity value but faces taxes on the gains
Enables the investor to use the funds for property improvements, new acquisitions, or other business purposes Frees up the capital invested in the property but hinders further growth in their real estate portfolio
Requires evaluating the potential savings and costs of the refinancing process, including upfront fees and any prepayment penalties on the existing loan Involves the transaction costs and tax implications tied to selling the property

It’s vital that investors look closely at their unique situation and goals. This helps them pick the best path, whether it’s refinancing or selling, to achieve their equity goals and long-term aims.

Timing for Commercial Loan Refinancing

Finding the best time to refinance a commercial loan needs careful thought. You should consider a few key points. These include the current market, the loan’s interest rate, and your own financial health.

When to Refinance?

It’s a good idea to refinance your commercial loan if your business is doing well. Things like having a better credit score, making more revenue, or having a solid history help. Refinancing can save you money, for example, by getting a lower interest rate or finding a better loan type.

Using your equity to grow your business or to combine various debt better are also reasons to refinance.

When Not to Refinance?

However, not all scenarios are good for refinancing. If your credit or business performance is weak, you might not qualify for better terms. Make sure the costs of refinancing don’t eat up the savings you could make. It’s crucial to ensure that refinancing fits in well with your business plans and financial state.

Commercial Loan

commercial loan

Commercial loans are for business needs, like buying real estate or funding operations. They are not like home loans. They usually need bigger down payments and are based on a business’s money, not just a person’s credit. With commercial loan refinancing, owners can get better terms on their debts.

Commercial loans look at how healthy a business is, financially. Lenders often ask for bigger down payments, between 20% to 40%. They also have shorter payback times, usually 5 to 25 years, not the 30 years you see in home loans.

Lenders check a company’s income, debt coverage, and credit when giving out commercial loans. This helps ensure the business can keep up with the loan and manage the property well.

Commercial loan refinancing lets business owners or investors improve their loan terms. They might get lower rates, more time to pay, or chance to use the property’s equity. This can be good for growing the business, investing more, or managing debts better.

Also Read: Understanding Business Loan Requirements


Refinancing a commercial loan can help business owners and real estate investors. It allows them to improve their loan terms, use property equity, or combine debts. By knowing about different commercial refinance loans and their rules, people can figure out the best time to refinance.

People might want to refinance to cut down monthly payments, change their loan type, or use their equity. Doing so can be good for both commercial real estate portfolios and small businesses. It’s about picking the right move that suits your business and finance plan. This way, they can make the most of refinancing and reach their business goals faster.


Q: What are the different types of commercial loans available for refinancing?

A: The different types of commercial loans available for refinancing include term loans, lines of credit, SBA loans, business lines of credit, and commercial real estate loans.

Q: How does a commercial real estate loan differ from a business loan?

A: A commercial real estate loan is specifically used to purchase property for business purposes, while a business loan can be used for various purposes such as expanding operations, purchasing inventory, or hiring employees.

Q: What is the process to get a commercial loan for refinancing?

A: To get a commercial loan for refinancing, you typically need to complete a loan application, provide documentation of your financials, have the property appraised, and go through the underwriting process.

Q: How does refinancing a commercial loan help with business growth?

A: Refinancing a commercial loan can help with business growth by lowering monthly payments, providing access to additional funds for expansion, or securing better loan terms to improve cash flow.

Q: What role does the Small Business Administration (SBA) play in commercial lending?

A: The Small Business Administration (SBA) provides loan guarantees to lenders, making it easier for small businesses to qualify for commercial loans by reducing the risk to lenders.

Q: What factors determine the right commercial loan for a business’s needs?

A: Factors such as the business’s credit history, cash flow, collateral, loan purpose, and repayment ability are important in determining the right commercial loan for a business’s needs.

Q: How do commercial loans work in terms of loan options and repayment plans?

A: Commercial loans offer various options such as fixed or variable interest rates, different loan terms, and amortization schedules, with repayment plans structured based on the type of loan chosen.

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