Software refactoring is crucial in development as it improves code structure without altering its external behavior. This process enhances the maintainability and readability of code, making it easier for teams to understand and modify. Refactoring can reduce technical debt, resulting in fewer bugs and improved performance during the software lifecycle. Additionally, it ensures that the codebase adapts to new requirements or technologies over time, fostering a more agile development process. Regular refactoring practices contribute to sustainable software development and long-term project success.