What is Refinancing Business Debt?
Refinancing business debt involves replacing an existing loan or loans with a new one, usually with the goal of securing better terms. This is a common financial strategy used by businesses of all sizes to manage their debt more effectively. Instead of simply making payments on an old loan a business takes out a new loan and uses the funds to pay off the old debt. The business then makes repayments on the new loan under the new terms.
The main reasons for refinancing are to reduce interest rates, lower monthly payments or consolidate multiple debts into a single loan. A business might also choose to refinance to switch from a variable interest rate to a fixed rate, which can provide more financial certainty and make budgeting easier. It can also be a way to extend the repayment term, which can reduce the pressure on a business’s cash flow in the short term, although it may lead to paying more interest over the long run.
For small and medium-sized businesses, refinancing can be a powerful tool for improving their financial health. It can help a business that has successfully grown and now has a stronger financial position to access more favourable lending terms than it could when it first borrowed the money. This can lead to cost savings and provide a business with more financial flexibility.
The Main Types of Refinancing
There are several ways a business can refinance its debt, depending on the type of debt and the business’s goals.
Loan Consolidation
This is one of the most common reasons to refinance. A business that has multiple debts such as a mix of business credit cards and smaller loans, can take out a single new loan to pay them all off. This is used to simplify a business’s finances, as it only has to keep track of one monthly payment and one interest rate. It can also help to secure a lower overall interest rate if the new loan is more competitive than the combined rates of the old debts. This can be a good way to reduce administrative burden and improve cash flow management.
Re-mortgaging a Commercial Property
For businesses that own their own premises, re-mortgaging can be a way to refinance debt. A business can take out a new commercial mortgage to pay off an existing one, often to take advantage of a better interest rate or a more flexible repayment plan. A business that has increased the value of its property over time may also be able to release equity from the property as part of the refinance, using the extra funds for other business needs.
Asset Refinance
Asset refinance involves using a business’s existing assets, such as vehicles or machinery, to secure a new loan. This can be a way to release capital from a business’s balance sheet. A business might own a piece of equipment outright but then sells it to a lender and leases it back. The capital raised from the sale can be used to pay off other debts or for general business purposes. This is a good way for businesses that have significant assets to access cash without taking on new, unsecured debt.
Refinancing in the Context of Business Finance
Refinancing is a key part of an overall business finance strategy and a tool for those that are in a solid financial position and want to improve their debt structure. Lenders will look for a business with a proven track record, good cash flow and a strong credit score to approve a refinance application.
Refinancing can be a good alternative to taking out an additional loan. Instead of adding to a business’s debt burden, it restructures the existing debt to make it more manageable. For larger businesses with more complex financial structures, refinancing can be part of a larger strategy to manage a diverse portfolio of debt and take advantage of changing market conditions.
The availability of different refinancing options from a range of lenders, including traditional banks and alternative finance providers, means that businesses have a number of ways to restructure their finances. Ultimately, a business should review its debt regularly and consider refinancing as a way to lower costs, simplify payments and free up capital that can be reinvested into the business.
Refinancing Business Debt FAQs
When should a business consider refinancing its debt?
A business should consider refinancing when it has a strong financial position and can secure a better interest rate or more favourable terms than its current loans. It is also a good option for businesses looking to consolidate multiple debts into one payment to simplify their finances.
Is refinancing a good option if a business is struggling to make payments?
Refinancing is typically for businesses that are financially stable. If you are proactively considering refinancing business debt to strategically better manage affordability, then it’s worth looking into. If the business has already found itself struggling and perhaps missed any payments, then a lender will be less likely to approve an application, based on the struggling finances and affordability and the business should seek some professional guidance on the next best steps to manage this.
What is the difference between refinancing and loan modification?
Refinancing involves replacing an old loan with a brand-new one. Loan modification involves changing the terms of an existing loan with the same lender. A loan modification is usually a tool for businesses that are in financial difficulty and need to change their existing terms to make payments more affordable.
Can a business refinance both secured and unsecured debt?
Yes, it is possible to refinance both types of debt. A business might refinance a secured loan, like a commercial mortgage, by taking out a new secured loan. It can also consolidate unsecured debts, like credit cards, into a new secured loan.
Are there fees associated with refinancing?
Yes. When refinancing, a business may have to pay fees for the new loan, such as arrangement fees or valuation fees. Some old loans may also have early repayment penalties. It is important to compare these costs against the potential savings from the new loan to see if refinancing is a worthwhile option.