Man negotiates bank loan.
If you have better credit, need financial relief or want to refinance your loan, you may be able to negotiate lower interest rates. — SDI Productions / Getty Images

There are many reasons why you might want to renegotiate a loan you’ve taken out to support your business. Maybe your credit score has significantly improved and you’re hoping to take advantage of a lower interest rate. Or maybe the pandemic has negatively impacted your business and you’re hoping to find some relief to help make future payments.

Banks and lenders may be open to renegotiating your loan under certain circumstances. The process for renegotiating a bank loan depends on the terms and rate of the loan. Here’s what you need to know before approaching a bank to modify your loan agreement.

[Read more: 15 Commonly Asked Questions About Small Business Loans]

Renegotiating if your credit improves

One best-case scenario for renegotiating your loan with a bank is that your credit score has improved since you took out the loan, and you are eligible for a lower interest rate. Business owners who are in this position have a few options for renegotiating a bank loan.

First, start by reading the fine print. Some loans, especially mortgages, have what’s called a prepayment penalty. This is a fee that lenders may charge if you pay all or part of your balance before the loan’s maturity date, usually a percentage of the total payment. Prepayment penalties are illegal in many states, but check your loan agreement to be certain. If there is a prepayment penalty, it may be worth your financial commitment upfront, and you may not want to renegotiate the loan terms.

Next, assess your bank’s situation. Do you have multiple accounts with this bank? Is it in their interest to keep you as a customer? Try to understand their position going into the negotiation.

NerdWallet recommends shopping around for a new lender. “They will be glad to take your business because 1) your credit is even better now than it was before, and 2) they want to take over another lender’s good loan. Again, assuming no prepayment restriction, they’ll probably even offer to pay off the other loan in order to transfer you to their service,” wrote one expert.

You can leverage this competitive offer with your original bank during the renegotiation. This offer will basically leave the bank with two options: refinance the loan now that you have better credit, or renegotiate the loan’s terms. Both decisions lead to the same result for your business: better terms on your loan.

[Read more: How Can I Improve My Chances of Getting a Small Business Loan?]

Banks are open to renegotiating loans especially when the alternative is that your business is unable to repay a loan and facing bankruptcy.

Renegotiating if you need relief

Many business owners are seeking to renegotiate business loans because their financial situation is more tenuous than when they previously took out the loan. There are a few things you can try to change if you’re in that position.

“In a renegotiated loan, all parties agree to modify the loan's original terms. Modifications can include the interest rate or the length of the loan,” reports Investopedia. “In some cases, the rate structure can be modified by changing from a fixed-rate to an adjustable-rate loan or vice versa.”

Banks are open to renegotiating loans especially when the alternative is that your business is unable to repay a loan and facing bankruptcy. For a bank, the costs and risks associated with bankruptcy make it worth their while to work with you to improve your chances of paying back a loan. It’s also worth noting that many states offer mediation programs for businesses and individuals who aren’t able to work with a lender to negotiate a loan directly.

Another renegotiation option is called forbearance, which is when a borrower temporarily pauses mortgage repayments. This is considered a last resort if your business is facing foreclosure. Refinancing your loan may be a better option than forbearance.

Refinancing your loan

There are many types of business loans that are eligible for refinancing: working capital loans, microloans and equipment loans are just a few examples. Refinancing can save your business money by lowering your interest rate or reducing your monthly payment, thereby freeing up working capital.

Refinancing a loan means that you take out a new loan to pay off your existing loan. Then, you make payments on the new loan going forward. The biggest benefit of refinancing is that it can free up your cash flow. With lower monthly payments, you can divert funds that were previously going into loan repayments to areas of your business where you can grow sustainably and get back on track.

There are some potential downsides to refinancing. You may face prepayment penalties again if you pay off the old loan ahead of schedule. Refinancing also negatively impacts your credit score. And, current interest rates may be higher than when you took out the original loan. Make sure to work with a financial expert to weigh whether refinancing is truly the best option.

You should also be aware that the cost of refinancing can be prohibitive for many businesses. U.S. News and World Report notes that the cost to refinance, including underwriting and other fees, can total 1% to 5% of the loan. Refinancing might not make sense if you’re only getting a marginally lower rate.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published October 05, 2020