How to Refinance Business Loans & Business Debt
Business owners will likely experience some form of debt in their professional lives. Business loans, commercial mortgages, asset finance and other agreements all help businesses establish themselves, equip their workforces, buy the machinery they need etc – all in exchange for a predefined debt agreement.
Debt, like many other aspects of your business, must be proactively managed to ensure it doesn’t cause too much detriment to your business. The more debt and lenders you have involved in your business, the more complex it becomes to manage repayments and monitor the interest rates and repayment terms you have been offered.
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Refinancing gives businesses the option of reviewing their existing debts and making beneficial changes. At a basic level, this means moving from one type of loan to another with a new lender – though you may also be able to refinance with your existing lender. If managed correctly, a good refinancing agreement can transform your business’ relationship with debt and help bring new value to your growth plans.
Here at Rangewell, we help businesses from all sectors make smarter refinancing decisions and negotiate agreements on your behalf, all at no cost to you. Read on for our full guide to refinancing your debts, or contact us today if you’d rather discuss it over the phone.
What is refinancing?
Refinancing is taking on a new loan that pays off your existing debts. This may be with the same lender you’re already with or a new one and will generally mean new terms and rates must be agreed upon. Refinancing is a negotiation – the lender wants to see the strong business rationale for why they should take the risk in ‘buying you out’ of your existing debt.
Arranging refinancing is part of Rangewell’s expertise, which is why we’ve created this guide to demonstrate the value of refinancing your debts and the considerations you need to consider. Ultimately, refinancing is simply a term used to describe moving from one type of debt into a new one – the real challenge is in ensuring the new agreement benefits your business.
Common types of refinancing include:
- Moving from a short-term bridging loan into a commercial mortgage
- Consolidating multiple property loans into a single landlord portfolio loan
- Refinancing after business growth to release equity
- Refinancing commercial property loans
Why refinance your debt?
Refinancing your debts means considering your current loan type and needs. The specific type of business loan you have may not be suitable for your growth plans, or your general level of debt may be hamstringing your ability to grow. Factors include:
- You are on a short-term repayment loan that is highly restrictive: refinancing a bridging loan or similar agreement allows you to extend the term and often reduce the overall amount of each payment.
- You have multiple loans in place: if you’ve taken on several credit facilities for your business and you’re now having to repay each individually, refinancing can present an option to consolidate your debts into one manageable repayment.
- You want to switch from a variable or fixed rate: many refinance agreements allow the applicant to move from a variable or fixed rate into the other.
- You are struggling with repayment amounts: the overall size of your repayment amount is dictated by your borrowing, interest rate and loan term. Refinancing to extend the term means you’ll pay less each month. Often you can also reduce interest rates to minimise costs even more.
- You want to raise more money: if you’ve already taken out a business loan, you may think raising more finance is too risky or expensive. Often, lenders will allow a refinance agreement to be arranged for a higher amount of credit – meaning you can raise more capital without having to take on another separate loan.
- You want better interest rates: when negotiated correctly by an expert, refinancing can see your interest rates reduced and your payments slashed.
All of these factors can lead to a refinancing decision – but there are still other things you need to be aware of before you approach lenders.
When is refinancing a good idea?
All of the reasons above are valid justifications for exploring refinancing – but only if your business is in the right place to make it worthwhile. Refinancing means finding a new lender to take on your debts or for your existing lender to agree to switch the agreement.
Business owners must recognise the conditions that make refinancing worthwhile – otherwise, your original loan’s terms and rates may still be better than any new agreement. You need to be aware of these key factors that make it worth exploring refinancing:
Interest rates have changed
Global changes in the market often cause banks to adjust interest rates. If these rates have changed dramatically since you took on your initial debt, it can be worth refinancing with a lender willing to offer terms around these new interest rates.
Your business is no longer deemed as ‘new’
Lots of start-up businesses have to take on risky short-term loans secured by personal assets or with restrictive repayment schedules. As your business matures, lenders begin to see you more favourably and will offer stronger loan terms. If you’ve already taken on debt as a new business, you may find that refinancing a few years down the line once you’ve established yourself can result in far superior loan terms.
Your business has been performing well financially
The best refinancing agreements are made when a business is performing well and can justify the negotiations with a lender by showcasing its growth. A lender is always going to favour a business that can demonstrate growth as it lessens risk. If you’re aiming to reduce the overall size of your repayments, being able to show strong business performance over a number of years is more likely to lead to a good long-term loan offer from a lender.
Your asset, business or property portfolio has strengthened
Assets and property both carry a fixed value that tends to dictate the early terms you are offered by a lender. If you have added value to that asset or property, you can approach lenders and often secure a refinancing agreement with more favourable terms thanks to the higher value of the asset.
In the same vein, if your business has improved and has shown strong profitability over a longer period, refinancing your business loan can unlock better rates.
What are the negatives of refinancing?
In the context of business debt, it’s important to point out that refinancing does not reduce your actual debt amount and can even increase it. Refinancing simply means switching from one type of loan to another, usually with an aim to spread the repayments over a longer term than you currently have – thereby lowering the monthly cost but not always the overall cost.
If your business hasn’t improved financially, is still new to market or you have encountered any other challenges, refinancing may not be right for you as any new agreement may not be better than your existing agreements. It may be better for you to stick with your original loan or even explore bankruptcy or selling your business.
Refinancing vs debt consolidation
Debt consolidation is often spoken of as the same concept as refinancing, but it is a distinct practice that sees a business aim to reduce multiple loan agreements into a single repayment. This means seeking a refinancing agreement from a lender who will pay off your existing debts and combine your new debt into a single facility with them.
Unlike debt consolidation, refinancing as a term can also apply to businesses that have just one loan in place and simply want to switch to a new type or arrange better terms.
Can refinancing raise more capital?
To answer this question simply, yes. If you have existing debt, there’s no reason you can’t refinance to a loan for a greater amount and inject more capital into your business.
If you want to raise more capital, you need to find a lender willing to buy out your existing business loan or debt and then offer you a loan for even more money. For example, if you had a £40,000 business loan with one lender, you could refinance it into a £60,000 loan which would repay your initial debt and raise a further £20,000 to use in the business.
Whilst most lenders will generally expect you to accept longer term arrangements or a higher interest rate if you’re going to be borrowing more money from them, you don’t necessarily have to. Instead, you can demonstrate business growth or financial stability to show the lender that you’re low risk.
This is a delicate process and must be approached with expertise around each lender’s preferred client criteria and borrowing structure. Rangewell can help you refinance and unlock more capital without having to accept restrictive terms or rates. Contact us today for a chat about your business’ existing debt.
How to apply for refinancing with lenders
As with any finance agreement, applying is a matter of research and preparation. You must first research the lender’s market to identify banks or investors that seem suited to your needs. Remember, you can always contact your existing lender and ask them about refinancing but don’t rely solely on them, as they may not offer the best deal. Ideally, you need to choose a few lenders to negotiate with in this extremely competitive market.
Unfortunately, finding the right lender isn’t easy and usually leads to frustration – especially given many lenders don’t make it obvious which types of business they support or what kind of refinancing deals they may be willing to make.
Sometimes the best deals are with your existing lender but are not made obvious unless you specifically ask lenders about them. Instead, it takes a finance broker team like Rangewell, who knows the specialist departments in each bank and lender in the country, to help you identify the best option for you.
Once you’ve narrowed down the lenders you want to approach, you need to prepare an application. This application needs to show your business's strengths using the criteria we’ve already outlined. Update your business plan with your most recent performance figures and let lenders review it.
Realistically, the best way to apply is to work with Rangewell. We are independent finance experts who help businesses like yours either consolidate their debts or move from one type of finance product into another, all with your business and its interests in mind. We know every lender in the UK and can help ensure your application is as strong as it can be.
Get in touch today if you want to ask any questions about refinancing, debt consolidation and how to secure better rates or terms from lenders.