Time to refinance? Here's what you need to know

Starting up a business is expensive. From purchasing essential equipment to covering fit-out costs and paying for bonds and insurance, there are a lot of costs involved. If you've been through this process, you know how difficult it can be to break into the market and get your small business off the ground.

Once you’re up and running, you’ve probably got the mental space to reassess your finances. However, the reality is that years later, you may well still be paying the high cost of a startup loan.

In that case, refinancing could be a smart option to consider. Just as you review your mortgage every 3-5 years, you should revisit your business loan every 2-3 years—because you never know if you could be getting a better rate.

How does refinancing work?

When you refinance, you're essentially paying off your existing loan with a new one, usually under more favourable terms—whether that's a lower interest rate or an updated repayment schedule. Business owners can use this strategy to consolidate multiple debts into one loan or access the equity in their business, for instance.

Although refinancing can be a smart move, it’s still important to do your due diligence. In a nutshell, this means ensuring the new terms will actually benefit you and confirming your current circumstances are suitable for the new loan. We'll explain when it is or isn't a good idea to refinance shortly, but first, let's talk about potential benefits.

The benefits of refinancing your loan

Done at the right time, refinancing could allow you to:

• Access a lower interest rate
• Restructure your debt so that the repayments match your cash availability
• Gain more flexible features in a debt product to meet your business needs
• Increase your overall borrowing to give you access to new growth or strategic opportunities
• Consolidate debts to simplify financials and lower your overall repayments (for example, by moving credit card debt into your business loan)
• Release personal or business assets from security arrangements to use them for other purposes (for example, freeing up equity in your home to enable the purchase of an investment property)

Given the potential repayment, cash flow, and security benefits, it is always smart to check what refinancing can do for you. Best case scenario: you save money. Worst case: you stay with your current arrangement.

When to refinance your business loan

Consider refinancing if:

Your circumstances have changed. As your business evolves, your financial situation will change—and the loan terms that were once favourable may no longer align with your needs and goals.

Your credit score has improved. If your credit profile is stronger than when you originally took out a loan, there may be a chance for you to move to a better lender or more suitable loan type.

Your business is growing significantly. With growth come new financial needs, which may call for a different type of funding. Plus, if your business has become more stable, there's less risk involved for potential lenders, and you could secure better terms.

Interest rates have dropped. Perhaps market rates are lower or your business's financial health is better—either way, refinancing means you can lock in a lower rate and reduce both your monthly payments and total interest paid.

Your loan term is too short. If you're struggling to meet your repayments, refinancing to extend the loan term can be a smart move.

When not to refinance your business loan

Refinancing could be a strategic move for many reasons, but it's not always the way to go. Avoid refinancing if:

It is too expensive. Refinancing comes with certain costs you may not be aware of, including early exit fees, application fees, and closing costs. All up, these costs could outweigh the benefits.

Your credit score has dropped. A lower credit score often means higher interest rates, so if yours has dropped, it's not the right time to refinance.

You may lose a valuable relationship with your lender. Your current lender probably has a deep understanding of your business, so it's important to consider whether refinancing is worth breaking off that relationship.

The practical impact of refinancing

Depending on the complexity of your current debt, refinancing could be a challenging process or a straightforward one. Some requirements to be aware of include:

• Having to change lenders and going through some sort of customer onboarding process with a new organisation will take some time
• Before shopping around for a new lender, it may help to make a list of all the accounts you use in your business
• The repayment amount or loan term may be different, so be ready to adjust to a different schedule
• You may be asked to increase or decrease the security offered to the lender(s)
• Getting your head around the different product types offered by various lenders will involve some leg-work

Eligibility criteria for refinancing

The exact criteria will vary from lender to lender and depend on the type of financing you're after. Having said that, lenders will generally look at your credit history, business revenue, financial statements such as tax returns and bank statements, time in business, and business plan.

Thinking about refinancing? Our lending experts can help you determine whether it’s the right move for your business. Get in touch today.

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References

1. https://business.vic.gov.au/business-information/finance/raise-capital/refinance-your-business-loan
2. https://moneysmart.gov.au/managing-debt/debt-consolidation-and-refinancing