BGF explains: Business debt refinancing

Managing your existing debt through debt refinancing is an important part of running any business. The key is to ensure your debt level is sustainable and appropriate for your business, while confirming your borrowing is arranged on the best terms available in the market.

Managing debt is an active, ongoing process, as you should be aware of developments in the market that might affect your financial position, for instance changes in interest rates. Learn more in this deep-dive into debt refinancing, how it works, the advantages and disadvantages, and whether its right for your business.

What is debt refinancing for business?

Debt refinancing – sometimes called debt restructuring – describes the process of consolidating, changing and negotiating debts. Debt consolidation involves replacing multiple existing loans or other liabilities with new debt, which can be helpful if the new loan offers more favourable terms. Debt refinancing may also involve switching your current debt providers or lenders, terminating loans early, or adjusting the maturity of your debt.

Debt refinancing may allow you to:

• Negotiate a lower interest rate
• Shorten or extend your repayment period
• Gain more control over your cash flow
• Reduce your total monthly outgoings
• Better match your debt obligations to your growth and investment plans

Debt refinancing is a tool used by all kinds of businesses, not just those in straitened financial circumstances. Used correctly, debt refinancing is a proactive way to manage your finances to benefit from changes in interest rates or market trends, or to free up cash for business growth, expansion capital or other strategic opportunities.

Why do companies refinance their debt?

There can be a number of reasons for a company to consider debt refinancing. Businesses that have debts from multiple creditors may find it easier to negotiate better terms with a single party. They may, therefore, choose to consolidate several loans and other liabilities with a single loan (or at least a smaller number of lenders).

On the other hand, a company may wish to refinance its debt to take advantage of better interest rates. This can allow a business to reduce its interest payments and overall costs associated with borrowing.

Another reason to pursue debt refinancing is to remove some of the uncertainty around availability of capital. For example, a company may wish to change its debt maturity profile by extending the term of its borrowing. There’s considerable skill involved in knowing when is the most advantageous time to access longer-term finance. But, if done right, accessing longer-term finance could free up more capital for reinvestment into your business.

In addition, debt refinancing may be needed if a company has built up large credit positions, for instance with suppliers and other creditors, such as HMRC.

Advantages of debt refinancing

There can be numerous benefits of debt refinancing if carried out effectively. Pursuing debt refinancing can:

• Enable you to flexibly manage your business finances
• Offer you better interest rates
• Help your business’ cash flow
• Make it easier to manage your debts and repayment terms

Disadvantages of debt refinancing

On the other hand, there are risks associated with debt refinancing and it may not be right for your business at this time. Here are a few key points to note if you’re considering debt refinancing for your business:

• Debt refinancing is simply a tool for managing debts, not a strategy for paying them off. Deciding how much debt is appropriate and sustainable for your business is a decision that must be made by the management team and advisers.
• There are sometimes costs associated with debt refinancing. For instance, some lenders will impose an early repayment charge if you pay off your debt before the end of a fixed term.
• Debt refinancing may require you to make judgements about future movements in interest rates and other external factors. Depending on the nature of your business debt, this may be a difficult skill that requires significant experience and knowledge of the debt markets.

Is debt refinancing right for your business?

When seeking debt refinancing, it’s important to take into account a number of debt refinancing considerations that can affect its suitability and cost for your business. These include:

What is your business debt status?

Before pursuing debt refinancing for your business, you need to understand what your current debts are, which lenders you owe, and on what terms.

What is your credit risk?

The credit history of your business and future impact on your credit score or credit rating may make debt refinancing unsuitable for your business.

Can you consolidate your business debts?

Debt consolidation makes it easier for you to see what your business owes to lenders and when. It is also a way of reducing the number of different monthly payments you make and how many negotiations you have to go through.

What is the current debt market like?

Depending on the state of the market, interest rates may or may not be in your favour right now.

Do you require longer-term finance?

Debt refinancing can be suitable for short-term and long-term financing. Lengthening the terms of your business loans can be a way to reduce your monthly outgoings. Most facilities are still offered on a five-year or shorter timeframe.

Debt refinancing support

Depending on your motivations for seeking debt refinancing, it may be worth talking to BGF about what options we can provide. BGF is not a lender like a bank; rather, we offer long-term, patient capital to help businesses grow.

BGF has provided growth capital to hundreds of small businesses and medium-sized enterprises across the UK & Ireland. If your debt is a constraint on growth, BGF may be able to offer you a combination of equity funding and long-dated loan notes to help free up capital to expand your business.

The information contained in this article is for general information and use. It does not constitute any form of advice and is not intended to be relied upon in making any investment decision. Independent advice should always be sought as to whether a particular transaction is suitable having regard to your personal and financial circumstances.