Refinancing business debt
The pandemic has resulted in an unprecedented COVID-19 debt mountain for SMEs which the government has tried to tackle with schemes like the Coronavirus Business Interruption Loan Scheme (CBILS).
Refinancing your debt could be an option for your business too, and here is why.
Refinancing is where your existing debt facilities are replaced with new facilities that provide more suitable arrangements for your business.
Refinancing could involve using a new lender, changing what debt products make up your facility or increasing the funding limit on your existing facility.
For many businesses, the financing arrangements put in place in the first few years of trading are still in place many years later.
For example, a company starts off with a simple overdraft facility and may arrange for several modest increases in the facility over time, without really thinking about how suitable the debt arrangements are for its current and future needs.
The key reasons why businesses choose to refinance are:
- To fund business growth
- To gain improved interest rates
- To switch to a fixed or variable interest rate product
- To gain more flexible features in a debt product to meet your business needs
- To increase overall borrowing with a new debt facility
- To change the financial cash flow commitment required to fund debt (e.g. fully drawn advance to an overdraft)
- To consolidate debts to minimise and simplify repayments
- To release security over personal assets and/or specific assets as the business reaches a level of maturity at which point it has independent security to offer
Avoid these common mistakes
The refinancing process should not be undertaken lightly, as there are many issues which should be considered as part of your review.
You should undertake a thorough review of your business’ circumstances prior to making any commitments for refinancing.
When a business refinances the following issues can be either overlooked or not comprehensively considered:
Your existing facility may have exit fees which could outweigh any future interest savings.
Usually exit fees are charged by lenders if the debt facility is terminated or refinanced early.
Fees which apply to loans are disclosed by lenders in the terms and conditions of the debt products.
If you are unsure of what fees will apply if you repay your existing debt facilities before maturity, contact your lender and request them.
Costs associated with setting up new facilities
Changing to a new lender (as opposed to a new product with the existing lender) will attract additional costs such as application, documentation, and valuation fees (to value your security assets).
It’s easy to under-estimate them and again, they can outweigh the benefit of the refinancing exercise.
These fees are disclosed by lenders in the terms and conditions of the debt product.
It is recommended that you discuss the fees that apply with the lender when discussing any new facility.
If your new lender is keen to get your business you should be able to negotiate a waiver of some of the costs as part of the package.
Giving notice to your existing lender before you have a formal offer letter
Before you tell your existing lender you are moving on to pastures new, you must have a formal offer letter from your new lender – not one that is ‘subject to’ various conditions or an indicative offer only.
If the offer is subject to further due diligence, or valuations, the structure of the deal can still change significantly, depending on the outcome.
For example, if the valuation on an asset that is supporting your new debt facility is much lower than expected, the lender may reduce the overall facility limit or even withdraw the offer completely.
You must ensure that you have a firm offer letter before committing to changing lenders.
Under-estimating the strength of your relationship with your current lender
You need to assess the strength of your long-term relationship with your current financial institution.
Are there some intangible benefits to the business because, for example, the current provider understands your banking and business history in detail, which you may not be afforded in a new relationship?
What are the benefits of refinancing?
There are numerous benefits associated with refinancing your business debt:
You may find that a ‘fresh start’ with a new financial institution may not carry any of the long-term preconceptions which your previous provider had.
These may have included a poor trading period in earlier years or a particular experience they have had with another customer in your industry which has negatively influenced their lending decision-making for your business.
Access to more cash
Refinancing may also result in increasing the finance available for business growth.
You should ensure that, in taking on additional debt, the business can service the higher debt commitment and that the investment of the new finance is targeted at achieving a higher return for the business.
Simplified debt structure
There is often an opportunity to combine multiple debt finance arrangements into a single product to simplify repayments and potentially reduce your monthly repayments.
This may also be achieved by changing from a principal/interest product to an interest only product or using a leasing product.
Refinancing may also provide the opportunity for a change in the security required to support your debt facilities.
It is possible that over time the value of security (assets) that were provided to support the existing facilities has increased at a far greater rate than the level of borrowing.
As part of the refinancing review, consider what level of security assets will be required.
Refinancing a strong healthy business may also mean that there is an opportunity to separate your personal assets from security offered if the value of the business assets is sufficient to cover the borrowing (i.e. commercial land and building, debtors, fixed assets etc).
A good relationship with your lender is crucial to your business operations and in many cases, the financial survival of your business.
Lenders are vital to the financing of your business and a good relationship can help the business negotiate improved terms.
Even if you are satisfied with the service quality of your lender, you should still meet with them once a year to discuss your business requirements and areas of improvements in products and services that your business could use.
Our expert advisors can find you the right finance for your business – so you can focus on growing it.