Whether your business is experiencing rapid growth or a seasonal fluctuation in sales or you are looking for additional capital, refinancing your debt can be an option to achieve your goals.
Put more simply, refinancing allows you to restructure your debts in order to obtain better payment terms. You can also leverage your assets to replenish your working capital. With its wide range of applications, refinancing can benefit both thriving and struggling businesses.
Analyze your financial situation
The first thing to do before considering refinancing is to carefully review your balance sheet and cash flow statement to assess your business debts and what they are costing you.
If you have a cash flow problem, you need to demonstrate how you are planning to prevent the situation from happening again. Present conservative financial forecasts incorporating different scenarios (i.e. best and worst case scenario).
Remember that refinancing is only one option when evaluating your financial situation. Depending on your needs, equity financing, growth and transition capital financing, or a term loan may be a better fit for your business.
Know your refinancing options
After carefully assessing your financial situation, consider some of the most common scenarios where refinancing could benefit your business.
Lower your interest rates
You may be eligible for an interest rate drop if rates have gone down since you negotiated your loan. Likewise, your business may be showing stable and strong financial performance, putting the lending institution at lower risk, giving you an edge to renegotiate the interest rate lower.
You may also want to convert a variable rate loan to a fixed rate loan . If you’re looking for peace of mind, a fixed rate guarantees identical payments for the life of the loan. You should preferably opt for a variable rate if the variations in interest payments do not seriously affect your financial viability.
Consolidate your debt
You might consider consolidating some of your debts with refinancing. That way, you’ll essentially end up with one long-term loan and one more manageable monthly payment.
It is also possible to combine larger loans and spread them over a longer period in order to reduce monthly payments.
Leverage financial leverage from assets to complete special projects
Another option for refinancing is to use the equity in your fixed assets with leverage . Basically, this means that you put your buildings or your equipment as collateral to obtain more capital. Refinancing your assets allows you to obtain more funds to develop new markets, restructure your business, do research and development or renew your products.
Transaction Example: Leverage Assets to Accomplish Special Projects
ABC Co. is a provider of auto insurance, home insurance, life insurance, travel insurance and commercial insurance products.
The company owned an existing building as well as vacant land that it wanted to use to finance the construction of an office building. At the same time, the company wishing to refinance loans in force linked to its building in order to improve the terms and conditions.
Purpose of the loan
Construction of an office building (including contingencies)
Refinancing of existing loans
In this example, ABC Co. refinanced its existing loans and increased the amortization period from 17 to 25 years for Loan-02. The building pledged for Loan-02 was financed at 40% of its value and also served as part of the security for Loan – 01. By refinancing the existing building, ABC Co. was able to restructure its debts and improve its cash flow to support its growth and the construction of the new building.