Should you refinance your business loan? Here's what you need to know

Henry Baker

Friday, 12 June 2020

If your business has grown since taking out finance, you might be ready to shop around for a lower rate, more cash or better terms.

But what exactly can refinancing do for you, and when is the right time to do it? We’ve outlined the key benefits and considerations to keep in mind so that you can be confident in your decision.

What does refinancing involve, and how does it work?

Whether you’re paying off a home, business asset or commercial property, refinancing can get you a better deal and more suitable features, provided the timing makes sense for you.

The process of refinancing involves paying off existing debt with a new debt facility. You can set this up with your existing lender or a new one, depending on who offers the best solution.

Applying for a refinance is simple. You can head directly to a lender or find a more tailored solution via our free loan finder.

Benefits of refinancing your business loan

Refinancing can facilitate your business’ next phase of growth, help you save money and make life easier. Let’s take a closer look at each benefit.

Get a better interest rate

When starting a business, having few assets makes it difficult to find affordable finance. Refinancing as your company matures can help you secure a lower rate. Even if you’ve been operating for several years, the market changes and lenders regularly update their offering, so shopping around can pay off.

Increase cash flow or facilitate growth

As your business grows, so does your budget. When planning new initiatives you’ll be factoring in costs for additional assets, hiring new employees, building out teams, marketing and operations. Refinancing can help you secure additional funds to propel your business into this next phase of growth.

A longer loan term can make repayments more affordable and easier to manage, meaning more money up your sleeve to invest in day-to-day operations.

Switch from a variable to fixed interest rate (or vice versa)

Maybe you’re on a variable rate loan but you’re expecting rates to skyrocket in the near future. Now would be a good time to look at switching to a fixed rate loan. Or, maybe your fixed rate period has ended and you’re not comfortable with your new variable rate. Refinancing can help you find something more suitable.

Gain more flexibility or additional features

You might want to access new features that your current loan doesn’t offer, like an offset account, redraw facility or the ability to make additional repayments and pay your loan off sooner.

Consolidate debt

Having debt lying around in several accounts can get messy. If managing unconsolidated debt is starting to clutter your mind or take too much of your time, it might be time to consolidate. Debt consolidation brings all of your debt together in one place, making your life easier, reducing paperwork and potentially lowering your repayments.

Release security over personal assets

When you started your business, you likely secured your loan with personal assets. As your business matures, you might want to release those assets and secure the loan against your business instead.

Refinancing a commercial property loan

To be considered for a commercial property refinance, most lenders will want to see your loan has been paid down to at least 60-70% of the property’s value.

Some lenders might be more lenient, but generally, your interest rate becomes more favourable the more you’ve paid off.

Refinancing equipment

Refinancing assets and business equipment to get a better rate is also possible. Essentially, your chosen lender will buy the equipment from you and then lease it back out on new terms, and (ideally) a lower interest rate.

When should I refinance?

Refinancing could be a great move for your business, but it should never be taken lightly. You’ll want to make sure your new debt facility supports your business’ growth goals.

Consider exit fees and other terms outlined in your contract to figure out whether it’s the right time to shop around.

Good reasons to refinance include:

  • ‘Outgrowing’ your current arrangement, and needing extra funds to support your growth strategy, purchase assets or run new initiatives.
  • Snapping up a lower interest rate or better terms.
  • Reducing paperwork and making your life easier, through debt consolidation.
  • Lowering repayments with a new lender, or extending a loan term with your current one to make repayments more affordable. While your interest rate and fees might end up costing more in the long run, you’ll benefit from extra capital week to week. This can reduce financial strain on your business and facilitate growth.
  • Being dissatisfied with the performance or customer service of your current lender, and finding a more favourable one.

When shouldn’t I refinance?

Refinancing can be expensive. You should not refinance if the costs outweigh the benefits. Before making a move, consider the following potential fees:

  • Application costs. Some lenders require an upfront establishment fee for setting up a new loan.
  • Discharge fees. You might be charged a fee for early termination, and this generally sets you back a few hundred dollars.
  • Break costs. These fees only apply if you’re on a fixed rate term. If you decide to terminate your loan before the fixed rate period ends, you’ll likely be charged break costs which can total up to $10,000.
  • Valuation fee. If you’re refinancing equipment or a commercial property, you’ll need to have your asset valued which could incur a fee of up to $5,000. You’ll also need to factor in some additional time for this process.
  • Settlement fee. Once your new loan has been settled, some lenders charge a fee to cover the administrative costs involved in settling your loan.

Double check the terms, conditions and penalties associated with your current finance agreement. If you need a hand, chat to a lending expert to weigh up the pros and cons of refinancing and make sure you’ve considered all angles.

Other considerations

Remember, a lower interest rate doesn’t necessarily mean better value. It might look good at first glance, but does that low interest rate come with higher fees, or less favourable terms?

Our lending experts analyse financing solutions with a fine tooth comb to make sure you’re getting good value, not just a good rate.

We also consider your unique business and growth goals when walking you through your refinancing options.

5 Steps to refinance

  1. Decide whether refinancing is the best option for you. Make your calculations and weight up the pros and cons to figure out whether refinancing is actually worth it.
  2. Compare the refinancing solutions on the market. Take rates and features and into account, as well as customer reviews and outcomes.
  3. Find a lender and product that best suits your needs. There are hundreds of products on the market. Make sure you do the shopping around to land a good deal.
  4. Apply. Complete any necessary paperwork to get the ball rolling. Factor in some extra time for valuation if you’re using a property as security for your loan.
  5. Sign on the dotted line. Once you’re approved, it’s time to seal the deal. Your old loan will be replaced with the new one.

Am I eligible for a business loan refinance?

Eligibility for refinancing your business loan depends on the following factors:

Your credit score A good credit score will not only increase your chances of a successful refinance, but might also contribute to a lower rate.

The general health of your business Good financials, stable cash flow and steady growth are great signs that your business is in it for the long haul.

Your assets Valuable business assets provide security for your loan, meaning that your lender will have a solution in recoup losses if you were to default. With security, you’re considered lower risk.

It’s time…

To sum up, you might be ready to refinance if:

  • Your business has grown since taking out finance and can afford to borrow more cash for new investments
  • Your fixed rate term has ended, and you’re not comfortable with the new variable rate
  • The market rate is expected to increase, and you’d like like to lock in a fixed rate for better predictability of your repayments
  • Your debt is becoming difficult to handle—reduce stress and lower costs by consolidating
  • Due to changes in your business, repayments are not as affordable as they used to be and you need to boost cash flow
  • You’re simply unhappy with your rate or lender, and want to see whether there’s a better deal out there

Still unsure if refinancing is the way to go? Our lending experts can help you crunch numbers, weigh up pros and cons and check what you qualify for before you proceed. They’re available to chat for free, and have 100+ years lending experience combined.

Henry is a Senior Product Specialist specialising in working capital solutions. He loves helping entrepreneurs achieve their growth goals and getting to know their businesses in-depth, in order to find the most fitting product for their needs.

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