How to refinance business debt

What refinancing actually achieves

Refinancing means replacing one or more existing facilities with a new one, and businesses usually do it for one of three reasons: to reduce the interest rate or fees being paid, to consolidate several smaller facilities into one with simpler reporting, or to release equity from an asset such as a property or a fleet that has grown in value since it was originally financed. Each of these has a different lender conversation attached to it.

It is worth being clear about which reason applies before approaching the market, because a rate reduction refinance is underwritten differently from an equity release refinance. The first is largely about the strength of trading, the second is largely about the value of the asset and the loan to value the new lender will accept.

Consolidating multiple facilities

Businesses that have taken on several short-term facilities over a few years, perhaps an asset finance line, a merchant cash advance and a small unsecured loan, often find themselves paying several sets of fees and juggling multiple repayment dates. Consolidating these into a single term facility can simplify cash flow management considerably and often lowers the blended cost of borrowing, because a single larger facility usually prices more favourably than several small ones.

The main obstacle is early settlement costs on the existing facilities. Some agreements carry exit fees or minimum interest clauses that reduce the benefit of refinancing, so it is worth getting settlement figures in writing before committing to a new structure.

Releasing equity from property or assets

Where a commercial property or a fleet of vehicles has been financed for several years, the loan balance has often reduced while the underlying asset value has held or grown, creating equity that can be released through a refinance. A new lender will commission a fresh valuation and lend against a proportion of that value, typically 60% to 75% for commercial property, with the difference between the new loan and the old balance released to the business as working capital.

This route is popular for funding a deposit on further property, an acquisition, or simply rebuilding cash reserves, but it does increase gearing on the asset and should be sized conservatively against what the trading business can actually service.

What lenders check before approving a refinance

A refinance lender wants to see the same core information as any new lender: recent accounts, management information and a clear explanation of why the new facility is being sought. They will also ask for statements or a redemption figure on the facility being replaced, and for property or asset refinances, an up to date valuation.

One thing that catches businesses out is that a history of missed payments on the existing facility, even where the underlying business is now performing well, makes a refinance considerably harder to place. Lenders read payment history on the facility being refinanced as a strong signal, so timing the approach for a period of clean conduct matters.

Timing and process

A straightforward asset or invoice finance refinance can complete in two to three weeks. Property backed refinances that require a fresh valuation and legal work typically take six to ten weeks. Starting the process a good two to three months before any existing facility renewal or balloon payment date avoids being forced into a rushed, more expensive deal.