After interest rates remained higher for longer, the economic mood has shifted and interest rates may finally be ready to move down. Naturally, business owners are wondering if now is a good time to look at refinancing. That answer will depend on several factors.
First, consider what type of loan that you have — a fixed rate or a floating rate. Floating rate loans are often tied to an index such as Prime that is influenced by the Federal Reserve. So when the Federal Reserve reduces rates, floating rate loans typically benefit from the lower rate without the need to refinance.
Next, look at your loan documents to see if you have a pre-payment penalty that would require you to pay your bank a fee to refinance the loan before maturity. These are more common on loans with a fixed rate. Part of a bank’s funding comes from fixed rate deposits like CDs, so often banks will include prepayment penalties on loans to offset these fixed costs when rates fall.
Discuss your refinancing options with your banker. It’s best to do this sooner than later, so you don’t miss an opportunity to refinance if rates fall then trend back up. Have your financial statements readily available including year-to-date company financials, as well as budgets or projections for this year and next. That way you can not only discuss refinancing; but with rates falling it may be a good idea to look at expansion opportunities if your business is ready for it.
Answers provided by Pete Zeiser, President - Chesterfield Commercial at Midwest BankCentre. He can be reached at 314-633-6762 or pzeiser@midwestbankcentre.com.