Refinancing doesn’t magically erase debt, but it does repackage it in a way that can work better with your budget. Below we’ve included some considerations that will help you determine if your pharmacy is ready to reap the benefits of refinancing your debt, or if it’s better to hold off until the time is right.
Many times, desperate small business owners choose to refinance or restructure their debt as a last-ditch effort to keep their business afloat long enough to avoid declaring bankruptcy. However, this is not always the case. Even successful business owners might consider refinancing debt when the market conditions are right. This is a savvy and common practice that takes advantage of improved financial or personal conditions, including lower interest rates or an improved credit rating to avoid leaving money on the table that could otherwise be invested back into your business.
If you’re interested in refinancing your pharmacy’s existing debt, you’ll want to check the current rate to see if the market is working in your favor. For example, if you were looking to refinance in the first quarter of 2020, when fixed-rate small business loan interest rates were down over the previous year and your debt was issued during a time of higher interest rates – refinancing might have been a good choice. By refinancing your existing debt, you could have paid back a high-interest loan with capital secured from a new low-interest loan, resulting in lower monthly payments.
Taking advantage of favorable market conditions can be a simple yet effective strategy for minimizing your pharmacy’s overall costs. Of course, whether or not this strategy will work for your business depends on a multitude of factors, including the terms of your current loan and your ability to secure a new one with lower interest rates.
Before you commit to any financial plan, do your research. How competitive are the terms of your current loan? How much interest remains to be paid? Are there any pre-payment penalties? Be sure to work with a trusted lender and evaluate your business’s interest expense to determine if current market conditions make refinancing a smart plan for your independent pharmacy.
If your credit score has improved since the time of your initial loan agreement, then you might want to take a closer look at refinancing as a business-improvement strategy. Your initial loan’s approval, and resulting terms, is based in part off your credit profile at the time of application, and you’ll likely have a higher chance of securing more favorable rates and terms via refinancing if you currently have a higher credit rating.
Check your credit score to see where it stands in comparison to when you first secured a loan for your pharmacy, and evaluate whether it’s strong enough to withstand the negative side effects of applying for a new loan. When you apply to refinance a loan, lenders will typically conduct a hard inquiry on your credit report, which can temporarily cause your credit score to drop. A single inquiry is nothing to fear, but be careful of incurring multiple inquiries for loans in a short time, which can damage your credit score and signal to lenders that you’re desperate for financing.
If you continue to regularly pay off your new loan over time, you’ll likely see your credit score improve as the result of a strong payment history. This can lead to opportunities to refinance on even better terms in the future.
Refinancing takes an enormous amount of paperwork and preparation. For example, U.S. Small Business Administration loans require three years of tax returns, one year of bank statements for both the owner and the business, and the business’s financial statements.
Your documentation should demonstrate to potential lenders that your business is a sound investment and will generate solid returns. If you’ve had three to six months of net profit, low debt ratios, and great operating income, then as long as you have the documentation to prove it, you’re likely to be approved and receive better terms.
Owning a thriving pharmacy doesn’t automatically mean you’re in the right place to refinance. As an independent pharmacist, you’ve already got a lot on your plate. Getting your finances in the right spot for a new loan could mean spending a significant amount of time, energy, and money. You and your financial advisor will need to spend that time (and cost) to prepare. For perspective, the cost to refinance, including underwriting, origination and other fees, can total 1% to 5% of your original loan. If taking the necessary steps to refinance is cost-prohibitive for you, then you might want to consider waiting until you have the resources available to devote to securing the appropriate documentation.
Whether or not refinancing makes smart business sense is unique to every independent pharmacy owner. For instance, if pursuing this strategy saves you a substantial amount of money by lowering your interest rates, then it may be a no-brainer. However, if the time and energy spent organizing your loan application outweighs the benefit of marginally lower savings, then maybe it’s not the solution for you. Make sure to ask the right questions and do your research before committing to any financial plans.