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The burden of debt can be overwhelming for some businesses, particularly when a commercial scenario has changed significantly over time. Perhaps market decline has negatively affected a business’ cash position, for example, or servicing the debt has simply become too expensive.

In situations like these, some businesses choose debt refinancing to ease the pressure on their finances and reduce the debt burden. It’s important to establish that refinancing is the best option in all cases, however, as this solution can also be unfavourable in some circumstances.

RBR Advisory can assess your working capital situation and levels of debt, and advise on whether debt refinancing may be the best option for you.

What is debt refinancing?

Debt refinancing involves replacing one or more existing loans with a new loan that offers more favourable terms. This may be a lower interest rate, for example, or an extended repayment period, but the business benefits by reducing its outgoings on a month-to-month basis.

Debt refinancing differs from debt consolidation in that a single loan can be refinanced and replaced with a new loan offering better terms. For debt consolidation to be viable, a number of debts must be incorporated into a single loan.

Why choose debt refinancing?

Businesses tend to refinance when servicing their debt has become such a burden that it’s hampering growth. It’s often clear when refinancing can help, but also important to factor in potential downsides in terms of a business’ ability to repay the new loan.

Ensuring the terms and conditions are favourable to the business in the long-term is crucial, and the decision to refinance requires careful assessment. Debt refinancing can breathe new life into a business, however, by releasing the working capital it needs to flourish.

"RBR Advisory can assess your working capital situation and levels of debt, and advise on whether debt refinancing may be the best option for you."

What are the benefits and risks of debt refinancing for business?

Benefits

These are just some of the benefits refinancing can offer a commercial enterprise:

  • Lower monthly repayments if the loan term is extended
  • Reduced rates of interest allowing faster repayment of the capital element
  • When several debts are refinanced, contact with a single lender rather than multiple creditors simplifies the day-to-day running of the business
  • Boosting the availability of working capital means business finances are under less strain and the threat of insolvency is reduced 

Risks

  • Refinancing can be risky if businesses are unsure whether or not they can keep up with repayments
  • Refinancing could mask a deeper underlying but fundamental issue, such as the business having adopted the wrong operational or financial strategy
  • Even when interest rates are lower, an extended repayment period could mean the business is paying more interest as a whole over the loan period

When to refinance business debt

Businesses might choose to refinance if planned growth is impossible due to their levels of debt, or when working capital is severely compromised and financial distress is becoming apparent.

If business owners cannot demonstrate their financial difficulties are temporary rather than long-term, however, they may not be eligible for refinancing. This is because it’s unlikely a business in serious financial distress would be able to meet the contractual terms of a refinancing loan over its whole term, which would pose a serious risk to lenders.

If you’re considering refinancing business debt, our partner-led team at RBR Advisory will provide the reliable advice you need. We have industry-wide experience of debt refinancing and operate an extensive network of offices throughout the country. Call one of our experts for a same-day consultation free-of-charge.

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