Everything you need to know about refinancing your business loan to get a better deal.
Many business owners take a “set and forget” approach to business financing – once they take out a loan, they simply continue making regular repayments.
However, just because a particular loan was the right choice for your business once upon a time doesn’t necessarily mean it’s still the perfect fit. Whether you’re searching for a lower interest rate, wanting to access equity in your business or just trying to take control of your debt, there are several reasons why refinancing a business loan can be a good idea.
How do you refinance a business loan?
Refinancing a business loan involves replacing your current financing arrangements with new ones that are more suitable for your business. This could involve consolidating multiple debts into one business loan, refinancing to a loan with a lower interest rate or even accessing the equity in your business.
However, the exact refinancing process will vary depending on your business circumstances. You may need to refinance by doing the following:
- Changing lenders but retaining the same loans and finance products
- Choosing different loans and finance arrangements with the same or a different financial institution
- Combining multiple debts into a single loan facility or product
- Increasing or decreasing the total amount you borrow
- Changing your regular repayment amount or frequency
- Changing the security offered to the financial institution as collateral for the loan
What are the benefits of refinancing?
There are several reasons why refinancing an existing loan may make good financial sense for your business.
- Finding a lower rate. If you’re paying a high rate of interest on the money you owe and there are newer loan products available with lower rates, refinancing can help you find a better deal. This could provide you with additional funds to invest back into the business.
- Reducing your loan repayments. If you can lock in a better interest rate or decrease your loan amount, you can reduce your total loan repayments and free up additional funds to spend elsewhere, for example on renovations or purchasing new equipment.
- Switching to a fixed rate. Perhaps you’re on a variable rate loan and are expecting rates to increase shortly, so you’d rather switch to the security of a fixed-rate loan. Alternatively, maybe the fixed-rate period has ended and your loan has switched to a higher variable rate, so it’s time to shop around for a better deal.
- Increasing cash flow. By refinancing to a better deal, you can lower your loan repayments and increase the amount of cash available to help you manage your business from one day to the next.
- Making it easier to manage your debt. By consolidating multiple debts into one loan, you only have to worry about servicing a single loan rather than making repayments towards several different loan amounts. This can free up more time for you to put back into your business.
- Accessing the equity in your business. Refinancing can also allow you to access the equity you have built up in your business over the years to fund future spending or upgrades.
- Releasing security over personal assets. If you offered a personal asset (for example your home) as security for a loan when you first started your business, the business may now have its own assets that can be offered as collateral. Refinancing can allow you to release the security over your personal assets.
- Taking advantage of tax benefits. Refinancing a business loan can help you access negative gearing and depreciation benefits. However, you’ll need to speak to your accountant or a tax specialist for detailed advice on how this would work.
- Accessing flexible loan features. Another reason you may want to refinance is if your business could benefit from flexible loan features that your existing loan doesn’t offer, for example an offset account or the ability to make additional repayments without penalty.
What questions should I ask before I refinance?
While refinancing a business loan could potentially provide a range of important benefits for your business, you should never take the decision to refinance lightly. Before you refinance, make sure to ask yourself the following questions:
- Do my current loan arrangements meet the needs of my business? Do the loans you have in place provide affordable and flexible access to the funds you need, or are they no longer suited to your requirements?
- How could refinancing benefit my business? What’s the purpose of refinancing your existing debt arrangements? For example, will you be able to secure a better interest rate, reduce your repayment amount, access equity in your business or gain some other benefit?
- What is the cost of refinancing? Refinancing a business loan will usually incur additional fees and charges, so make sure you’re fully aware of the total cost involved before taking the leap. For example, you may need to pay a discharge fee as well as deferred establishment fees, while refinancing away from a fixed loan will also incur a break fee.
- Are there any other risks to be aware of? Other than underestimating the cost of paying out your existing loans, other risks to watch out for include the cost of setting up a new loan (establishment and application fees, valuation fees, legal costs etc), and switching to a financial institution that does not offer the same business banking facilities as your current bank. You should also be aware that applying to refinance a business loan will also add an enquiry to your credit file.
You’ll need to comprehensively assess your business’s current financial circumstances alongside the benefits and risks of refinancing before deciding to proceed with any changes.
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The business loan refinancing process
The business loan refinancing process is reasonably straightforward. While the process may differ slightly depending on the needs of your business and the finance arrangements you’re considering, you will generally follow a handful of simple steps:
- Decide whether you need to refinance. In some cases, you may be financially better off in the long run by sticking with your current arrangements, for example if the cost of refinancing outweighs the benefits. Conduct a thorough cost/benefit analysis to decide whether business loan refinancing is the right solution, and make sure you have a clear goal in mind before you start looking for alternative financing.
- Compare your options. Shop around and compare a range of loans from a variety of lenders. A finance broker who specialises in business loans can help you assess and consider all available options to decide whether they represent an improvement on your existing debt arrangements.
- Choose a lender and loan. Once you’ve found the right lender, the right loan and all the right business banking features, make your final decision.
- Apply for a loan. Prepare all the necessary documentation requested by the lender and apply for the loan. Detailed documentation is usually required before you can refinance, and you will usually need to supply business financials for the past two years, profit and loss statements, projected financials, business tax returns and more. Check with your lender for a full list of required information.
- Get approval. Approval will only be granted once you have supplied all the necessary business documentation and your application has been assessed. If you’re listing a property as security for the loan, the lender will probably want to have it valued.
- Settlement. The final step is to sign the new loan contract and then use the new loan to pay off the old one. You will usually need to begin paying off the new financing arrangement within a month.
How much does it cost to refinance a business loan?
The cost of business loan refinancing varies greatly depending on the current debt arrangement you have in place and the new loan you will switch to. However, you will need to consider the following costs:
- New loan costs. As well as an application or establishment fee for your new loan, you may also need to pay an upfront fee to your new lender.
- Break costs. If you’re on a fixed-rate loan and you refinance before the end of the fixed term, the lender will usually charge break costs. Depending on the loan and lender, this could cost your business up to $10,000.
- Discharge fee. Loan discharge fees range from $100 up to around $400 and vary depending on the lender.
- Valuation fee. If you’re refinancing to buy a commercial property or business equipment, the lender will want to have this valued and may charge a fee of up to $5,000 to cover this cost. Fees may also apply if the property you offer as collateral needs to be professionally valued.
- Settlement fee. Once your loan has been approved and the contract signed, some lenders will charge a settlement fee to cover any remaining administrative costs.
When should I not refinance my business loan?
When is refinancing a business loan a bad idea? Once again, whether refinancing is the right solution really depends on the financial circumstances of your business and the risks and benefits of adjusting your loan arrangements.
However, you may not want to refinance your business loan in the following situations:
- It will cost too much. Add up the total cost of refinancing, including the cost of winding up your current debt arrangement(s) and taking out a new loan. If the cost outweighs the potential benefits, refinancing is not for you.
- It will adversely affect other business banking products. If you’re considering refinancing to a new lender, make sure you’re aware of the effect it could have on other business banking products you have with your original financial institution. For example, will you still be able to enjoy all the same products and features you can currently access?
- You haven’t received a firm letter of offer. Don’t commit to changing loans or lenders until you have received a firm letter of offer from your chosen financial institution. If your refinancing arrangement is still subject to terms and conditions, for example a satisfactory valuation of a security property, it’s too early to know for sure whether the refinancing arrangement will meet your needs.
- You will lose the all-important relationship with your current financial institution. If your business is a long-term customer of a particular bank, your bank may have an in-depth understanding of your business, its history and its banking needs. Switching to a new lender could see you lose this relationship, which could have significant consequences for your business moving forward.
Is my business eligible to refinance a business loan?
The exact eligibility criteria for business loans will vary from one lender to the next, and also on the type of financing you are applying for. However, you will generally need to meet the following criteria:
- Have a good credit history
- Have been in business for a specified minimum period of time
- Provide proof of your business income, such as bank statements, tax returns and projected cash flow statements
- Provide a business plan
- Provide copies of your loan statements for the past six months (in some cases)
Other criteria, such as being able to provide security for the loan, may also apply depending on your circumstances. Make sure you thoroughly research a loan’s eligibility criteria and put together a comprehensive application. This will maximise your chances of approval and help you refinance a loan that suits all your business borrowing needs.