A company’s financial obligations are often refinanced or restructured by replacing or reworking old debts through corporate refinance. Corporate refinancing is frequently used to improve a firm’s financial position. A firm may improve its credit quality and obtain more favourable interest rates by refinancing.
The result of a corporate refinancing is generally lower monthly interest payments, more advantageous loan terms, risk reduction, and greater cash availability for operations and capital investment.
In this article, our partners at SME Capital take a look at the factors to consider when you are looking to refinance your business.
1. Business Financial Health
Have a clear idea of your company’s credit score and prospects for future business as refinancing to a lower interest rate can happen quickly and then vanish just as swiftly, this should be an ongoing exercise in every firm.
A windfall business transaction that provides a large infusion of cash into the company account, for example. When it comes to credit reports assigning an appealing rating to your credit risk, this is when they are most likely to do so, making borrowing more affordable.
It’s also critical to keep an eye on developing requirements and the potential for unanticipated circumstances, especially in today’s uncertain economy.
If a company’s earnings grow quickly, it may be preferable to consider debt financing rather than equity finance. Fast-growing firms require more funding on an ongoing basis.
Businesses that take on debt financing are able to use debt financing because interest payments made by companies on debt are deductible. In order for debt financing to be feasible, the company must be able to generate enough cash flow to pay its interest costs on the debt finance.
2. Interest Rates
The current interest rate is one of the most important reasons for corporate refinancing.
Companies might save a lot of money by refinancing their existing debt at a lower interest rate. Such a move might free up cash for operations and additional investment, which will help to fuel future development.
In the near and long terms, you minimise the impact of interest rates on your earnings by lowering your borrowing rate.
Lowering your customer acquisition costs can help you qualify for additional loans if needed, as well as improve your debt service ratio. Lower borrowing costs also make your firm more appealing to investors or potential purchasers.
Another thing to consider is whether a firm expects to receive a cash inflow from a client or other source. A large influx of cash may improve a company’s credit rating and lower the cost of debt issuance (the better its creditworthiness, the less discount it will need to pay).
Companies in financial difficulties might refinance as part of their debt obligations
Free cash flow allows you to be proactive and seize market opportunities when they arise.
Loan refinancing can help you save money by lowering your monthly payment.
Even if you don’t have any money, you may be able to get a loan with a longer term that allows you to make lower monthly payments. Simply be sure you know what additional costs you’ll incur in order to receive that lower monthly payment.
4. Associated Costs
There are significant costs connected with refinancing a business, no matter how big or little it is. Large businesses that can create debt and equity need the assistance of a team of bankers and attorneys to finish a successful financing procedure.
Small companies must pay bank and title fees as well as interest payments to bankers, appraisers, and attorneys for numerous services.
5. Tax Benefits
If you are a small business owner, you may be able to deduct the costs of refinancing your business on your taxes. The deduction is available for the points paid to get the new loan, as well as any origination fees and appraisal costs.
6. Review of Existing Terms
Examine the terms of your existing contract to see how much you’re paying and whether there is an early termination charge. It’s vital to think about the fact that refinancing may save you money in the long run, especially if it allows you to access more capital for new business growth.
7. Your Business Goals
Knowing what you want to get out of the process is important in choosing the best facility for your needs. Do you want to improve cash flow? Is it essential that the funder understands your company? Or do you require more services?
8. Personal Security
Many financial products will be supported by Personal Guarantees of the business owners. While lenders like SME Capital do not require PGs, where in essence the business owners are placing their personal and family assets at risk, you do need to consider that many will require this and whether you are prepared to provide this.
9. Options On The Table
Once you’ve determined the current value of your loan and your objectives for this process, you can look around to discover a more suitable alternative.
When considering this, keep in mind that the cheapest financing option isn’t always the greatest for your company.
Instead, you should consider whether the facility’s cost is reasonable compared to the service supplied and the opportunities it opens up for your company.
What can you refinance?
1. Term Loans
Term loans are a classic type of financing that is repaid over a set length of time. These loans can be used to finance almost any big business-related purchase.
2. Lines Of Credit
A line of credit is a business owner’s ability to utilise a predetermined amount of money as they choose, rather than receiving a lump-sum payment after approval.
3. Working Capital Loans
Businesses that require short-term cash to cover day-to-day operations, such as payroll, debt payments, restocking inventory, and keeping up with rent are good candidates for these loans.
4. Short-Term Business Loans
A short-term business loan is a type of unsecured, interest-bearing loan that businesses may use to meet immediate cash flow demands, such as temporary payroll costs, corporation tax and VAT, unforeseen expenditures, and other unexpected cash flow shortages.
If you already have financing contracts in place, the first step would be to combine any outstanding amounts. Instead of taking out another company loan to cover the extra capital you require, you may consolidate your obligations into a single entity, increase your overall borrowing, and possibly obtain a better rate as a result.
When should you refinance?
1. Your business has grown, and you need more money
If your business has expanded beyond your initial expectations, you may need to access more capital than what your current financing arrangement allows. In this case, refinancing can give you the extra funding you need to keep up with your growth.
2. You need to lower your interest payments
Interest payments can take a big chunk out of your profits, so it makes sense to try to lower them whenever possible. If you can find a refinancing option with a lower interest rate, it can free up cash that can be used elsewhere in your business.
3. You want to change the terms of your financing
If you’re unhappy with the terms of your current financing arrangement, such as the repayment schedule or the interest rate, refinancing can give you a chance to negotiate more favourable terms
4. You want to consolidate your debt
If you have multiple financing products with high interest rates, it can be helpful to consolidate them into a single loan with a lower interest rate. This can save you money on interest payments and and in many cases improve your overall cashflow position by reducing repayments and it makes it easier to keep track of your debt.
5. You need to access cash quickly
If you need cash for a business emergency, such as paying off suppliers or covering an unexpected expense, refinancing can give you the quick infusion of cash you need.
When not to refinance?
If you don’t need the cash that a refinanced loan would provide, it may not make sense to go through the process. Remember, refinancing is a way to access cash that you may not be able to get from other sources.
If you’re having trouble making the payments on your current loan, refinancing may not be the right solution. In some cases, it may even make your situation worse. Before you refinance, make sure you’re confident that you’ll be able to make the new payments.
For more information visit the SME Capital website here