Refinancing and consolidating business debt: when it makes sense

Many businesses build up borrowing over time: a loan here, a cash advance there, a credit card and an overdraft. Each made sense when it was taken, but together they can take a large share of monthly income. Refinancing means replacing one or more of those facilities with a new one. Consolidating means bringing several into one. This guide explains when it can help and when it does not.

Why businesses refinance

The usual reasons are:

• Lower monthly repayments: spreading the balance over a longer term can reduce the monthly cost and free up cashflow.
• Simplicity: one repayment, one lender, one set of terms.
• Better terms: if the business has grown or improved since the original borrowing, a cheaper rate may be available.
• Fewer facilities: replacing several short-term advances with one longer facility can stop repayments crowding out everything else.

The trade-off: monthly cost vs total cost

Stretching a debt over a longer term almost always lowers the monthly repayment but can increase the total interest paid. For example, replacing a 12-month advance with a three-year loan might roughly halve the monthly payment, but you will be paying for longer.

That can still be the right decision if it stabilises cashflow and lets the business trade normally, but go in with your eyes open. Compare the total amount repayable under both options, not just the monthly figure.

Check the cost of leaving

Before refinancing, find out what it costs to settle your existing borrowing early:

• Some loans let you settle early with a saving on interest.
• Many merchant cash advances and short-term products have a fixed total repayable, so settling early may not save anything.
• Some agreements include early repayment fees.

Ask each existing lender for a settlement figure. That figure is what the new facility needs to cover.

How lenders assess a refinance

A refinancing lender looks at the same things as any other lender, plus a few more:

• Affordability of the new repayment: in our model, total monthly repayments should not exceed about 15% of average monthly turnover.
• Conduct on existing debt: missed or returned payments on current facilities will be noticed in your bank statements.
• How many lenders you have: a large number of concurrent facilities is a warning sign for many lenders.
• Existing charges: if a lender holds a debenture, it may need to be repaid and released, or agree to rank behind.
• Whether the existing lender allows it: some lenders will top up or refinance their own facility; others won't lend alongside another lender.

Working out a target repayment

A good starting point is to decide what monthly repayment the business can comfortably afford. In our quote, if you choose refinance, we ask how much you want to refinance, what you pay each month now, and what you would like to pay. We then estimate the repayment on that amount over your chosen term, using an illustrative rate, and if your target is lower, show you what term would get you there.

You can also experiment with the business loan calculator on our home page to see how term and rate change the figure.

When refinancing makes sense

• Your monthly repayments are squeezing day-to-day cashflow.
• You have several facilities that could be replaced by one.
• The business has improved and may now qualify for better terms.
• An existing facility is ending and you need to plan what replaces it.

When it may not

• If settling the existing borrowing early is very expensive.
• If the new facility only adds cost without improving cashflow.
• If the underlying problem is falling sales or margins. More time to pay can help, but it will not fix a business that is losing money month after month. In that case, it is worth speaking to your accountant.

A simple example

A business has three facilities: an advance costing £2,400 a month, a loan at £1,100 a month and a credit card at £300 a month, a total of £3,800. Its average monthly turnover is £22,000, so repayments take about 17% of income. Replacing all three with a single three-year loan might bring the monthly cost below £2,000, well within a 15% affordability guide, but the business would be paying for longer. The decision comes down to whether the cashflow relief is worth the extra total cost.

Getting started

Gather your latest statements for each facility, the settlement figures, and three to six months of business bank statements. Then run a quote and choose "Refinance or consolidate debt" as your purpose. Figures are indicative only and subject to lender assessment and approval.