Business Loan Refinancing

What is business loan refinancing?

Business loan refinancing replaces one existing loan with a new loan, so that the business repays the original lender in full and owes the new lender instead. It is a narrower exercise than business debt refinancing, which may cover several agreements and different product types, and narrower still than consolidation, which brings multiple debts together. Here the question is simply whether one loan, on its own, should be swapped for another.

Which business loans are commonly refinanced?

• An expensive unsecured loan taken quickly when the business needed cash, often at a rate that no longer reflects the business's trading record.
• A loan with a balloon payment. Some agreements, particularly asset-backed ones, end with a large final sum. Refinancing spreads that sum over a new term rather than paying it in one go.
• A loan whose fixed period is ending. When a fixed rate expires the loan may revert to a variable rate that is higher or less predictable, and the early repayment charge often falls away at the same time.
• A scheme loan moving into repayment. Government-backed loans taken during a period of support can have repayment profiles that were manageable at the time but not now. Caution is needed, because the rate on those loans is often lower than any replacement.
• A loan with daily or weekly collections that a term loan with monthly payments would make easier to manage.

How is the settlement figure calculated?

Ask the existing lender for a written settlement figure for a specific date. It is normally made up of:

1. The capital outstanding at the settlement date, which is lower than the original amount borrowed.
2. Interest accrued from the last payment to the settlement date.
3. Any early repayment charge. Common formulas are a percentage of the balance, a fixed number of months' interest, or, on fixed-rate loans, a break cost reflecting the lender's own funding.
4. Less any rebate of interest that was charged in advance, which applies to some fixed-sum agreements.

Settlement figures are usually valid for a short window, often 28 days, after which they need to be reissued. For regulated agreements with sole traders and small partnerships, the lender must provide a settlement figure on request and the early settlement rebate is calculated by a prescribed method.

Comparing the old loan with the new one

The mistake most businesses make is comparing the interest rate on the old loan with the interest rate on the new one. The rate is only one input. The comparison that matters is between two totals:

• Remaining cost of the old loan: the number of payments left multiplied by the payment amount, plus any balloon payment at the end.
• Total cost of the new loan: every repayment over the new term, plus the arrangement fee, plus any valuation, legal or introducer fees, plus the early repayment charge paid to leave the old loan.

If the second figure is lower, refinancing saves money. If it is higher, refinancing costs money, and the only reason to proceed is a lower monthly payment that the business genuinely needs. Both outcomes can be legitimate, but the business should know which one it is choosing.

Documents a new provider will ask for

• The existing loan agreement and the written settlement figure
• Three to six months of business bank statements showing the current repayments
• Latest filed accounts and recent management figures
• Details of other borrowing and any personal guarantees already given
• Identification for directors, partners or the sole trader

Timing: when to refinance a business loan

Timing can change the answer. The early repayment charge on many loans steps down over time or disappears at the end of a fixed period, so a refinance that costs money in month 18 may save money in month 24. A balloon payment should be addressed several months before it falls due, not in the final weeks, because a new provider will need time to assess the application. Filed accounts showing a stronger year will often produce a better offer than accounts that are about to be superseded.

An unsecured refinance can complete within one to two weeks once documents are in. Build in longer if the new provider wants security or if the old lender is slow to issue settlement figures and confirm closure.

When to leave a loan alone

Refinancing is not always worth doing. The loan is usually best left in place where:

• The existing rate is lower than anything available, as is often the case with government-backed scheme loans.
• The early repayment charge or break cost wipes out the saving over the remaining term.
• Fewer than around twelve months remain, so the arrangement fee alone outweighs any interest difference.
• The new loan would require security or a larger personal guarantee that the business is not willing to give.
• The business is behind on the current loan. A new lender is unlikely to help, and the loan may need to be restructured instead. Our business loan arrears page explains the options.

Benefits and drawbacks

Frequently asked questions