Business finance comes in all shapes and sizes, and while this can make it a tricky area to navigate, you can also use it to your advantage.
Refinancing involves either consolidating debts, or raising cash using the assets in your business. In this article, we’ll have a look at these two main areas of refinancing and begin to explore how they could help your business.
There are two main reasons you might consider using new debt to consolidate old debt — to refinance to a cheaper loan, or to convert multiple loans into one for simplicity’s sake.
Of course, affordability is always crucial, but if your circumstances have changed you might consider refinancing as a legitimate way to improve your cash flow position. Here are some of the benefits of refinancing to consolidate debt:
A better interest rate
It’s worth reviewing your company’s debts on a regular basis, and keeping an eye on comparative deals on the market. Perhaps your business is now in a much better position than when you first took out your loan? As a result, you might find that you’re now able to access a lower interest rate than before.
Refinancing to a cheaper loan could mean lower monthly repayments and therefore an improved cash flow. Or perhaps a lower interest rate will enable you to reduce the term of your commitment but for the same monthly amount.
Along similar lines, if your position has changed for the better and you want a larger cash injection into the business, refinancing often makes more sense than taking on a second loan if you’re looking to raise extra cash.
Boosting cash flow
Changing circumstances could also mean that you need to try and reduce your monthly outgoings for a while. You might be able to consolidate a loan or loans into a new product over a longer term, with the outcome of borrowing the same amount but spreading the cost over a longer period — which would bring down the cost of the monthly payments.
It could be that you’ve accumulated several different loans over the years, from different lenders and for a variety of purposes. Paying off all those loans with one new loan from one lender can simplify your debt management. And as discussed above, it may also save you money via a better rate of interest.
The key takeaway with debt consolidation is that circumstances change — what was a perfect fit for your business in the past may not necessarily be fit-for-purpose in the present. And even if your interest rate doesn’t change, it might make life easier to have one lender in the picture instead of several.
Refinancing assets involves using the assets in your business to release or ‘unlock’ cash. It’s similar to how you might re-mortgage a house.
Typically, asset refinancing involves using assets in your business as security for a loan, or unlocking cash from items you have recently bought outright. The two are slightly different, so it’s worth taking a closer look at both.
Using assets as security
With this form of refinancing, you borrow cash against the value of an asset in your business on the basis that if you default on your repayments, the lender can take ownership of that asset. In that sense, ‘asset refinance’ is really just another way of saying ‘secured business loan’.
Typically, lenders will accept machinery, equipment, commercial property and vehicles as long as they don’t depreciate too much and are central to the running of your business. The value of the loan will depend on the value of the item. For example, an asset worth £10,000 might mean you can borrow £5,000–£7,500.
Sale-and-leaseback or sale-and-hire-purchase-back
If you’ve recently bought an asset outright with cash, asset refinancing allows you to turn back time and choose to spread the cost instead. The big advantage of this type of arrangement is that you get a lump sum in cash and then pay for the asset monthly.
Refinancing example: London nightclub
A recent Funding Options customer, a nightclub in London, had got into significant debt in the past — with just under 2 years of trading history and urgent refurbishment costs to cover, the nightclub owner’s only option was to combine loans from a few different short-term lenders, leading to an expensive set of repayments every month.
She came to Funding Options for a refinance when the business had passed two years of trading — meaning the firm was eligible for a wider range of lenders. We refinanced the most expensive loans to save her an incredible £14,000 per month in repayments, so the nightclub can continue repaying the refurb costs at a much more manageable level.
While debt consolidation is about restructuring debt to your advantage so that it works better for you, asset refinancing is using your assets to unlock cash.
The type of refinance you can opt for will largely depend on the assets in question, or the position of your business. In any case, the options are varied — hopefully this article has given you a better understanding of the refinancing market.
Please note, this article is about refinancing for businesses. If you’re looking for help with personal debt, visit the Money Advice Service for debt advice.
Conrad Ford is Chief Executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. @FundingOptions