Restructuring Your Franchise Debt for Better Terms

Franchise refinancing means taking your existing business debt and replacing it with a new loan – ideally one with better terms (like a lower interest rate or longer term). Much like homeowners refinance their mortgage to save money, franchise owners can refinance loans they originally took to start or run the business. At Liberty Franchise Lending, we often work with franchisees who have expensive short-term loans or want to restructure their debt to improve cash flow. In this final section, we’ll explain who should consider refinancing, how much you can refinance, what rates and terms you might get, factors that affect approval, the pros/cons of refinancing, and answer FAQs about restructuring your franchise debt.

Refinancing is typically for existing franchise owners who already have one or more loans on their business. If any of the following apply, refinancing might be worth exploring:

• You took out a high-interest loan (or a merchant cash advance) during startup or a tough time, and now your business is stable enough to qualify for a lower-rate loan.
• Interest rates in general have fallen since you got your loan, and you could now get a loan at a lower rate.
• Your current loan’s monthly payments are straining your cash flow, and you’d like to extend the term or get a better rate to reduce those payments.
• You have multiple loans (equipment loans, working capital advances, etc.) and want to consolidate them into one loan for simplicity and possibly savings.
• Your original loan had a balloon payment or is coming due, and you need to replace it with new financing.

Essentially, refinancing is for franchisees looking to save money or reduce financial stress by changing the financing structure of existing debt. If you’re already happy with your loan’s rate and payment, there’s no need to refinance. But if you see room for improvement or risk in your current debt (like a looming big payment or an interest rate that’s way above market), then refinancing is a smart option to consider.

In a refinance, the loan amount usually corresponds to the outstanding balance(s) of your current debt. You’re not getting “new money” (except maybe a bit extra for fees or a cash-out portion); you’re restructuring what you already owe. So amounts can range widely:

• If you’re a small franchise with, say, a $50,000 high-interest loan remaining, you might refinance that $50K.
• If you have an SBA loan balance of $300,000 and some other smaller loans, you might refinance the whole package into a single $400,000 loan.
• For larger franchises or multi-unit operators, refinance loans could be in the millions if that’s how much debt you’re consolidating or replacing.

Many lenders have minimums (often around $30K or $50K) for refinancing loans, since very small amounts might not be worth refinancing after fees. There isn’t a hard “max” separate from normal lending limits – if you have a $2 million loan and can qualify to refinance it, that’s the amount.

Sometimes franchisees also choose to do a cash-out refinance – meaning you refinance more than the existing debt and take the extra cash for working capital or other needs. For example, if your franchise property has gained value or you’ve paid down a lot of principal, you could refinance for a higher amount and pull out some equity. SBA 504 loans now even allow some cash-out for eligible business expenses when refinancing real estate debt. However, cash-out will depend on having sufficient collateral and lender allowances.

In summary, typical refinance loan amounts are whatever you currently owe (from tens of thousands up to multi-million), potentially plus any additional amount you decide to cash out – subject to lender approval.

The whole point of refinancing is often to get a lower interest rate than you currently have. The rate you secure will depend on the type of refinancing loan and market rates at that time:

• If you refinance via an SBA loan or traditional bank loan, you could land a rate similar to current SBA/business loan rates. For example, if you originally had a 20% short-term loan, refinancing with an SBA 7(a) could bring your rate down to around 10% or so (whatever the prevailing SBA rate is). SBA 504 refinance loans for real estate/equipment currently offer fixed rates in the mid-6% range, which is very attractive compared to typical business loan rates.
• If you refinance one SBA loan with another SBA program, the rate could drop as well. A recent rule change has made it easier to refinance debt with SBA 504 loans to save on interest.
• For conventional bank refinancing, you might see rates in the single digits if your business is strong. As noted earlier, average small business loan rates at banks were roughly 6%–12%. So a refinance could put you in that window, depending on your qualifications.

What if your existing loan already has a decent rate? Then the reason to refinance might be more about adjusting the term or switching from variable to fixed. But many franchisees consider refinancing when they have high-cost debt. For example, if you were paying a factor rate that equates to 40% APR on a merchant cash advance, refinancing that with even a 15% APR loan is a huge win.

It’s worth noting that sometimes refinancing can mean a slightly higher rate but a longer term, resulting in lower payments – whether that’s beneficial depends on your goals (lower payments vs. overall interest cost).

Also, be aware of closing costs – a new loan might come with origination fees that effectively increase your cost. Still, in most cases where refinancing makes sense, you’ll be moving to a significantly lower rate environment, which can save you a lot over time.

When you refinance, you also get to set a new repayment term for the new loan. Often, franchise owners use refinancing to extend the term, thereby reducing monthly payments. Key points on terms:

• You may go from a short remaining term to a longer one. For instance, if you had 2 years left on a loan but payments were high, you might refinance into a new 5 or 7-year loan, greatly cutting the monthly obligation.
• SBA 7(a) refinance loans can go up to 10 years (or 25 if primarily refinancing real estate). SBA 504 refinances for real estate can go 25 years. So, a refinance could potentially reset the clock with a decade or more to repay, depending on what’s being refinanced.
• If your original loan was variable rate and you fear rising rates, you might refinance into a fixed-rate loan, locking in a stable rate for the term. Many SBA 504 refis offer fixed rates, for example.
• Conversely, if you had a longer term loan but at a high rate, you might refinance into a shorter term if you can afford higher payments – just to quickly eliminate debt at a lower cost.

The new loan can be structured as needed: it could be a standard term loan with monthly payments, or if consolidating multiple debts, the lender might pay off each of your creditors and give you one consolidated payment.

Importantly, lenders (and SBA for SBA-to-SBA refinancing) will typically check that refinancing provides a tangible benefit – like at least a 10% reduction in monthly debt payments or moving from variable to fixed rate, etc. Assuming it does, they’re generally supportive of lengthening terms to help the business.

One thing to watch: if you extend the term significantly, you might pay more total interest over the long run despite a lower rate, simply because you’re paying for more years. That’s a trade-off to consider. You always have the option to pay extra on the principal later if cash flow allows, to reduce that total interest.

In summary, refinancing gives you a chance to “reset” your loan term in a way that best suits your current situation – often resulting in lower, more manageable payments.

Refinancing is essentially taking out a new loan, so lenders will evaluate it much like any business loan application, but with some extra focus on your existing debt and payment history:

• Current Loan Payment History: Perhaps the biggest factor is how well you’ve been handling your current loan obligations. If you have a solid record of on-time payments on your existing franchise loan(s), it shows the lender that you take debt seriously and can manage it. If you’ve had delinquencies or close calls, it could be a red flag. Lenders may ask for a payoff letter or history from your current lenders.
• Credit Score and Financials: By the time you refinance, ideally your business is in better shape than when you took the original debt. Lenders will check your updated financial statements, revenue, profit margins, and your personal credit. Improvement in these areas strengthens your case. For example, if your credit score went from 640 to 700, you’ll appear less risky now. Similarly, if your franchise has grown its revenues and maintains good profitability, lenders will be more eager to refinance your debt.
• Collateral (if any): Depending on what debt is being refinanced, collateral may play a role. If you’re refinancing an equipment loan, the equipment can still serve as collateral for the new loan (though it’s older now, which might slightly reduce its value). If you’re refinancing a real estate-heavy loan, an updated appraisal of the property might be needed. More collateral or equity (like if you’ve paid down a lot of the original loan) makes the new lender more secure and happy to offer the refi.
• Reason for Refinancing / Benefit: You should clearly articulate why you are refinancing and how it helps the business. Lenders (and especially SBA, if involved) want to ensure it’s not just moving money around – there should be a benefit like reduced payments, lower rate, etc. In fact, SBA requires demonstrating a refinancing improves your situation (like the 10% payment reduction guideline mentioned). From their perspective, this reduces the risk of future default.
• Loan Structures Being Paid Off: The nature of the existing loans matters. Some loans have prepayment penalties or are not allowed to be refinanced early. Before a refi, you’ll want to ensure your current loans can be paid off without excessive fees. Lenders will also verify the payoff amounts. If any of your current debt is an SBA loan, there are certain SBA rules about refinancing SBA with SBA (generally, 7(a) to 7(a) refi is limited, but 7(a) to 504 is now easier).
• Time in Business: If you’ve been in operation for a few years by now, that track record helps. A franchise with 3–5 years under its belt and stable operations is a good candidate for refinancing. If it’s only been a very short time (say less than a year since startup), lenders might be cautious unless you’re refinancing a bridge loan into an SBA now that you’ve become eligible.
• Personal Guarantees and Guarantor Strength: Similar to any loan, the lender will likely require a personal guarantee from the franchise owner(s) for the new loan. They’ll consider personal financial strength as well – for example, if your personal net worth has improved or you’ve built equity in the business, that’s a plus.

In short, if your franchise has been doing well and you’ve responsibly managed your existing debt, refinancing approval should not be too difficult to obtain. It’s often presented as a win-win: you get better terms, and the new lender gets a borrower with a proven payment track record and an established business.

Refinancing can offer multiple benefits:

• Lower Interest Costs: The most obvious advantage – if you secure a lower interest rate, you’ll pay less interest over time. This can mean significant savings. For instance, refinancing a $200,000 loan from 12% interest to 8% could save you tens of thousands in interest over the loan’s life. Lowering the cost of capital directly boosts your bottom line.
• Reduced Monthly Payments: By getting a lower rate or extending the term (or both), your monthly loan payments will likely drop. This frees up cash flow each month. For a franchise, that extra cash could be used for marketing, hiring staff, store improvements, or simply provide a cushion for slower months. Improved cash flow eases stress and gives you more flexibility in running the business.
• Consolidation and Simplicity: Many franchise owners accumulate a patchwork of loans (equipment lease here, credit line there, etc.). Refinancing can consolidate multiple debts into one single loan and payment. This simplifies bookkeeping and financial management – one interest rate, one payment date, one lender to deal with. It also might lower your overall effective interest if, for example, you roll a high-interest merchant advance and a moderate-interest equipment loan into one medium-interest term loan.
• Opportunity to Modify Loan Terms: Refinancing lets you essentially renegotiate the aspects of your debt. You could switch from variable to fixed rate, as mentioned. Or remove a co-signer if your business can now stand on its own (some refinance to remove an ex-partner’s guarantee). You might also be able to adjust the collateral requirements – e.g., possibly get a lien release on personal property if the business assets alone now suffice. It’s a chance to tailor the financing to your current needs.
• Taking Advantage of Market Conditions: If market interest rates have fallen or if lending programs have improved (like new SBA rules), refinancing allows you to capitalize on those external changes. For example, when SBA rolled out easier refinancing on 504 loans , many business owners jumped to refinance expensive conventional loans. Similarly, if the Federal Reserve cuts rates and banks start offering prime-based loans at lower rates, a franchisee can refinance to benefit from that.
• Stress Reduction and Business Stability: There’s a psychological and practical benefit to refinancing when it alleviates financial pressure. Knowing you have a comfortable payment and a better rate can reduce a lot of stress. It makes your business finances more predictable and sustainable. In many cases, refinancing can be the lifeline that keeps a franchise going – turning an unsustainable debt situation into a manageable one, thus avoiding default and keeping the business on track.