When It Makes Sense to Re-Amortize a Business Loan
Writen by: Pretha Yasmin
The re-amortization or recasting of a business loan is when you make a single payment to reduce the principal of the loan and decrease your total payments. In some cases, when you re-amortize a business loan, it will get you a better fixed interest rate. This can save you money on the loan in addition to reducing the monthly or term payment amounts.
There are situations where it can be beneficial, like when you need to lower your business debt ratio because an investor or a lender is looking at your company’s health. The reduced principal amount on your debt and business credit profile may help. Because re-amortizing your business loan often requires a large cash payment and a lender fee, you need to make sure you’ll still have cash on hand to cover daily operating expenses and any emergencies that may pop up.
Before jumping into a re-amortization, calculate if the savings will be worth it and if this decision will get your financial ratios to where you need them to be. The table below shows what the savings would be on the same loan if you re-amortize it to reduce the principal, while keeping the same interest rate.
| Principal remaining | Term remaining | Interest rate | Lump payment | Monthly payments | Total interest remaining | Total payments remaining | Savings |
| $100,000 | 3 years | 6% | $0 | $3,042.19 | $9,518.97 | $109,518.97 | – |
| $100,000 | 3 years | 6% | $20,000 | $2,433.75 | $7,615.18 | $87,615.18 | $1,903.79 |
There can be pros and cons to re-amortizing your business loan. Below, we’ll outline some of both.
When re-amortization of a business loan makes sense
Pros:
- Reduced monthly payments
- Lowered debt-to-income (DTI) ratio
- Can retain your current interest rate
- Doesn’t require credit check
If you have excess cash flow and your business is looking strong for the foreseeable future, re-amortization can be an effective way to reduce borrowing costs or reduce your debt ratio in preparation for new financing.
By making a lump sum payment and spreading the remaining balance over the same number of remaining payments, you reduce your monthly cost to free up more cash over time. The extra cash can be used strategically as needed, whether for hiring a new employee, replacing machinery, or making other investments to grow your business.
If your business used the loan to set up a new location and the new location is performing well, by re-amortizing your loan, you can reduce your debt-to-income ratio. This can help you secure a better deal on a new loan that could be used to open yet another location.
A good debt-to-income ratio is especially important for certain niches like real estate investing, where the investor uses a fix-and-flip model and has to get financing for the next project while they are waiting for a sale on their current one.
When business re-amortization is a bad idea
Cons:
- Requires a large lump sum payment
- Once paid, you won’t be able to take back the funds
- Not available for all loans
If you expect a period of uncertainty or financial pressure, re-amortization can add additional stress on your business by reducing your liquid assets. If a machine breaks or staff gets sick and you need temporary employees, you’ll have less cash on hand and may need a payroll loan or a standard small business loan to cover these expenses, whereas you could’ve just used the cash you had put down as the lump sum payment.
If a breakthrough in technology has allowed a competitor to produce a product for a lower price than you and is now pressuring your business to offer a discount, you could find yourself in a bind. By having re-amortized your loan, you’re already short on cash flow, so competing against them on price is going to be less of an option. You’ll need to either provide additional services that do not cost more money or hope your branding can support your business until you’re in a better fiscal position.
An example of an additional service could be providing quick maintenance, like checking tire pressure for free when a person gets gas, or making sure the settings on devices are done properly. These additional services may not cost you extra. Then, when your finances allow, you can invest in upgrading your own production capabilities with an equipment financing loan to make it easier to compete against other businesses in your space.
Other things to know with re-amortizing business loans
Re-amortization won’t be available for all types of business loans. Plus, in some instances, there could be fees like prepayment penalties, balloon payment fees, or other charges set by the lender when the financing is established with specific terms in mind.
With SBA 7(a) loans, prepayment penalties only apply to loan terms over 15 years (and you pay over 25% of the balance) in the first 3 years. The penalties are 5% (of the prepayment) in the first year, 3% in the second year and 1% in the third year. Your lender will be able to share more details.
Also, it’s a one-way process. Once the funds are paid, they won’t be available to you again. So, you need to be confident that the money won’t be needed for something else. Make sure you are fully staffed, have upgraded systems, and have cash flow available for emergencies.
Re-amortization of business loans is a useful tool when you have excess funds available, as it can help you reduce the monthly costs of borrowing and lower your DTI. However, it’s important to consider your business’s short-term needs along with your long-term goals to ensure you are not putting too much pressure on your cash flow by reducing your liquid assets.
SmallBusinessLoans does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
