Running a business often involves obtaining a business loan to cover daily expenses or support expansion plans. Over time, interest rates may fluctuate, cash flow can vary, and your company’s needs may change. Refinancing a business loan can help you adapt to these variations by restructuring existing borrowing to better match your current circumstances and goals.
In this blog post, we explore what refinancing actually involves and the potential benefits.
Refinancing a business loan involves replacing your current loan with a new one, usually with different terms. The new loan is used to settle the original debt, allowing you to make repayments under a fresh agreement that might have more favourable conditions.
The purpose of refinancing is usually to save money, improve cash flow, or align your borrowing more closely with your business needs.
The refinancing process is similar to applying for any business loan. Here’s a step-by-step overview of how it works:
The first step is to review your current borrowing carefully. Check the outstanding balance, the interest rate you’re paying, and whether there are any early repayment penalties or fees. Knowing the total cost of your existing loan helps you decide if refinancing is financially sensible.
Refinancing isn’t just about getting a lower rate. It’s about aligning your finances with your goals. Define your refinancing goals (such as freeing up cash flow or consolidating multiple debts), as this will help you choose the best refinancing option.
Business loan refinancing is accessible through banks, specialist lenders, and alternative finance providers. Lenders will review your business performance, credit history, and repayment record before making an offer. Working with a commercial finance broker like ASC can make this process much simpler, as we can access a wide range of lenders and negotiate terms on your behalf.
It’s essential to look beyond just the headline interest rate. Consider arrangement fees, legal costs, or early repayment charges from your old loan. A broker will help you calculate the total impact, ensuring you understand whether the refinancing deal genuinely benefits you.
After selecting the most suitable refinancing option, the application process starts. This step typically involves supplying financial details such as recent statements, management figures, or business plans, depending on what the lender requires.
Once the lender approves the loan and provides the funds, use your new loan to pay off your old one in full. From then on, you’ll make repayments according to the terms of your new agreement.
When done for the right reasons, refinancing can be a powerful financial tool. Here are some of the main advantages:
Refinancing can lower your monthly payments by extending the loan term or securing a lower interest rate. Reducing monthly repayment amounts can significantly ease cash flow pressures, freeing up working capital to reinvest in the business.
If you’re able to refinance at a more competitive interest rate, you could save money over the lifetime of the loan. Even a slight reduction in rates can make a big difference, especially with larger borrowing.
If your business has multiple loans or credit agreements, refinancing helps you combine them into one. This results in a single monthly payment, one interest rate, and less time managing different commitments. Consolidation can also lower the risk of missed payments.
Your business today may be very different from when you first borrowed. Refinancing allows you to adjust your loan terms to match your current situation. That could mean switching from a variable rate to a fixed one for certainty, or shortening the term to repay debt more quickly.
Some refinancing arrangements let you borrow more than your outstanding balance. Borrowing extra can provide a cash injection for investing in new equipment, expansion, or working capital, without needing a separate loan.
By smoothing out repayments and ensuring your finance matches your needs, refinancing can give you greater confidence in managing your business finances. It reduces stress and helps you plan for growth.
Refinancing isn’t always the best option. In some cases, early repayment fees or high arrangement costs might outweigh the advantages of a lower interest rate. That’s why it’s essential to assess the overall impact before making a decision.
It’s also crucial to think about your long-term plans. For instance, extending the duration of your loan may lower your monthly payments now, but will increase the total interest paid over time. Each business’s circumstances vary, so what suits one may not be ideal for another.
At ASC, we specialise in helping business owners access the right finance for their needs. With over 50 years of experience, we understand the challenges that come with refinancing and can guide you through the process.
We’ll take the time to understand your business, review your current borrowing, and explore refinancing options that genuinely work in your favour. With access to a wide range of lenders across the UK, we can negotiate competitive terms on your behalf, saving you time and stress.
If you’re thinking about refinancing, working with a broker like us makes sure you have an expert by your side, helping you evaluate the options and secure the right deal for your business.
