Key points
- Refinancing swaps an existing agreement for a new one. The debt does not disappear; its terms change.
- Common reasons are a better rate, a different term, a change of lender, releasing equity in an asset, removing a personal guarantee, or moving short-term debt onto a term loan.
- Exit costs matter. Early repayment charges, break costs on fixed rates, valuation and legal fees can cancel out a lower rate.
- A new term usually restarts the repayment clock, which can increase the total repaid even when the monthly figure falls.
- Refinancing is for businesses that can afford the new payments. A business in arrears may need restructuring or free advice instead.
What is business debt refinancing?
Business debt refinancing replaces an existing finance agreement with a new agreement, potentially changing the rate, term, security or repayment profile. The new facility is used to repay the old one in full, and the business then owes the new provider instead. The replacement might come from the same lender, which is sometimes called a product switch, or from a different one.
Almost any business borrowing can in principle be refinanced: term loans, commercial mortgages, asset finance, overdrafts that have become permanent, and revolving facilities. What changes from case to case is the cost of leaving the existing agreement and the terms available on the new one.
Refinancing or consolidation?
The two are often confused. Business debt consolidation takes several debts and replaces them with one facility, so the number of agreements falls. Refinancing focuses on the terms of borrowing, and the number of agreements may stay the same. A business with one large loan on an uncompetitive rate refinances. A business with five small facilities and five direct debits consolidates.
If the aim is to deal with one particular loan, our page on refinancing a single business loan covers the settlement-figure calculation and how to compare the old loan's remaining cost with the new one. Our article on consolidation versus refinancing works through the distinction with examples.
When do businesses refinance existing debt?
- To lower the rate. The business's credit profile has improved, or market rates have fallen, and the existing agreement no longer reflects that.
- To change the term. A longer term reduces the monthly payment; a shorter one reduces total interest. Either can be the right choice depending on cash flow.
- To change the lender relationship. Service has deteriorated, covenants have become restrictive, or the lender is withdrawing from the sector.
- To release equity in assets. A commercial property or fleet that has risen in value, or whose loan has been paid down, can support a larger facility, with the surplus used in the business.
- To remove or reduce a personal guarantee. A secured facility may allow a director's guarantee to be released, or capped at a lower figure. See our personal guarantees page.
- To move from short-term to term debt. An overdraft, merchant cash advance or revolving facility that is being used as permanent funding is often cheaper and more predictable as a term loan.
How does the refinancing process work?
- Review the existing agreement. Note the rate, the remaining term, whether the rate is fixed or variable, the early repayment clause, any security held and any guarantees given.
- Request a settlement figure. The lender confirms in writing what it will cost to repay on a given date, including any early repayment charge or break cost.
- Define what the new facility must achieve. A lower monthly payment, a lower total cost, a released guarantee and a longer term are different objectives, and they pull in different directions.
- Apply and provide documents. The new provider assesses affordability, trading history and credit history, and for secured facilities arranges a valuation.
- Complete and redeem. The new funds are used to repay the old facility, security is released and re-registered where relevant, and the old account is closed in writing.
Who is eligible to refinance business debt?
Providers want to see that the business can afford the new repayments and has maintained its existing ones. Most look for a trading history of at least a year or two, recent filed accounts, clean bank statements and a credit record without recent defaults. Secured refinancing also depends on the value and type of the asset offered.
Limited companies, LLPs, partnerships and sole traders can all refinance. Agreements up to £25,000 with sole traders and small partnerships are regulated consumer credit, so the provider must hold the relevant Financial Conduct Authority permission. Businesses with past credit problems may still find options, usually at a higher cost; our guide Can a business refinance with bad credit? explains what to expect.
Documents providers usually ask for
- The existing finance agreement and a written settlement figure
- Three to six months of business bank statements
- Latest filed accounts and recent management accounts
- Asset details and, for property, a valuation or evidence of value
- Identification for directors, partners or the sole trader
The full list, and why each item is requested, is in our guide to the documents needed to refinance business debt.
What does refinancing cost?
The cost of refinancing has two halves: leaving the old agreement and setting up the new one.
- Early repayment charges. Many agreements charge a percentage of the balance, or a number of months' interest, for settling early.
- Break costs on fixed rates. Where a lender fixed its own funding to match your rate, it may pass on the cost of unwinding that position. On larger facilities this can be substantial.
- Arrangement fees on the new facility, typically a percentage of the amount borrowed.
- Valuation fees where property, vehicles or equipment are taken as security.
- Legal fees for releasing and registering charges, including the provider's own legal costs where you are asked to cover them.
- Introducer or broker fees, which must be disclosed to you before you commit.
A new rate that is lower than the old one only saves money if the saving over the remaining term exceeds these costs. A provider should be able to show you the total cost of the new facility alongside the total remaining cost of the old one.
Benefits and drawbacks
Potential benefits
- A lower rate or lower monthly payment, where the figures support it
- A term that matches the asset or the cash flow better than the original
- Equity in assets put to use in the business
- A personal guarantee released or reduced
- Short-term, high-cost borrowing converted to predictable term debt
Possible drawbacks
- Exit costs and set-up fees can exceed the interest saved
- Restarting the term can raise the total repaid
- New security may put assets at risk that were previously unencumbered
- A credit search and a new agreement on the business's record
- Time and management attention during the switch
Three risks to check before you refinance
Resetting the clock. A loan with three years left refinanced over five years will usually cost more in total, even at a lower rate, because interest runs for two extra years. New security. Replacing an unsecured loan with a secured one lowers the rate by putting an asset on the line; if the business later struggles, that asset can be taken. Variable rates. Moving from a fixed rate to a variable one may look cheaper today but exposes the business to rate rises for the whole term. Ask what the payment would be if rates rose by two or three percentage points.
Who refinancing may not suit
Refinancing assumes the business can meet the new payments. It is rarely the answer where the business is loss-making, already in arrears, or facing a creditor who has started enforcement. In those situations a new lender is unlikely to offer terms that help, and the costs of switching add to the problem. Restructuring, which changes the terms of existing debts by agreement with creditors, or free advice from Business Debtline, is usually the better first step. A business whose problem is high repayments rather than solvency will find practical options on our high loan repayments page.
It also rarely suits a loan with a low fixed rate and a large break cost, or a government-backed scheme loan whose rate is below anything available commercially. In those cases the existing agreement is often the cheapest place for the debt to stay.
Alternatives to refinancing
- Consolidation, where the issue is the number of facilities rather than the terms of one.
- A product switch with the existing lender, which may avoid valuation and legal fees.
- A secured loan or asset-based lending where the business has assets that can support a larger or cheaper facility.
- Restructuring or a Time to Pay arrangement where the business cannot afford current payments.
Frequently asked questions
Can I refinance business debt with my existing lender?
Often, yes. Lenders may offer a product switch or a new facility to retain the business. It can save valuation and legal fees, but compare the offer against the wider market rather than accepting it by default.
How long does business debt refinancing take?
An unsecured refinance can complete within one to two weeks of documents being supplied. Secured refinancing involving a valuation, legal work and the release of an existing charge typically takes four to eight weeks.
Will refinancing remove my personal guarantee?
Only if the new provider does not require one, which is more likely on a secured facility, and only once the old lender has confirmed in writing that the original guarantee is released. Never assume a guarantee has fallen away because the loan has been repaid.
Does refinancing affect the business credit score?
The application involves a credit search. Settling one account and opening another is usually neutral if the new facility is paid on time. Several applications in a short period can look like financial stress.
Does Finance Business Debt arrange refinancing?
No. We are not a lender. We provide information and, where appropriate and at your request, may introduce you to third-party finance providers. See our regulatory information.