If you have an outstanding loan on your franchise business, you may be comfortable in the routine of making your monthly payment. However, hanging on to the same loan product through the end of its term may not always the best move.
In some instances, it makes sense to replace an existing franchise loan with a new one.
Understanding refinance loans
Through refinancing, you can substitute one debt obligation for another. In terms of franchise loans, this means swapping out your current loan for a new one with different terms.
The advantages of refinance loans
There are five primary reasons to refinance a franchise loan. These include:
Freeing up personal collateral: Your current loan may have required you to pledge personal assets, such as your home, as collateral. A new loan may allow you to release these assets from being used as loan security.
Reducing monthly payments: Whether through extending your repayment period or obtaining a lower interest rate, a refinance loan can help you decrease your monthly payment obligation.
Securing fixed interest rates: Variable interest rates are subject to increases. Refinancing a franchise loan to secure a fixed rate means eliminating this uncertainty.
Consolidating multiple loans: Having multiple franchise loans can be complicated, necessitating different monthly payments and reporting requirements. Refinancing allows you to consolidate your outstanding debt into a single loan.
Increasing liquidity: A profitable franchise business opens the door to recapitalizing in order to take equity out of your business and increase your liquidity through a refinance recapitalization loan.
Refinancing can be an excellent way to reduce your loan burdens.
Using refinance loans strategically
While refinancing your franchise loan can be beneficial, it may not always be the best course of action.
"For refinancing, if it's going to increase your payments and make you less profitable, it may not be the smartest thing to do at that time," said Joe Wong, a franchise finance specialist at ApplePie Capital. "You have to weigh the opportunity costs."
As a borrower, it's essential to analyze your current loan terms and consider how they impact your business objectives before applying for a refinance loan.
Qualifying for a refinance
Whether you're looking to release your personal assets or increase your liquidity to expand your franchise business, it's important to think about the long-term impact of replacing one loan with another.
Once you're satisfied refinancing is the right move, reach out to a franchise finance specialist to discuss your options.
In order to qualify for a refinance loan, the loan should not exceed three and a half times your earnings before interest, tax, depreciation and amortization (EBITDA). You should also be in good standing with your current debt in terms of repayment.
Lenders will also focus on your business' profitability. An unprofitable franchise unit will make obtaining a refinance loan more difficult.
