BGF explains: business debt refinancing
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Managing debt through debt refinancing is an important part of running a company. The key is to ensure your debt level is sustainable and appropriate for your business, while confirming that your borrowing is arranged on the best terms available in the market. Managing debt is an active, ongoing process, because you must be aware of developments in the market that might affect your positioning, for instance changes in interest rates.
What is debt refinancing for business?
Debt refinancing – sometimes called debt restructuring – describes the process of consolidating, changing and negotiating debts. Consolidation involves replacing multiple existing loans or other liabilities with a new one, which can be helpful if the new loan offers favourable terms. Debt refinancing may also involve switching 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 refinancing their loans or debt. Companies that have many debts from multiple creditors may find it easier to negotiate with a single party, instead of multiple creditors. They may therefore decide to consolidate several loans and other liabilities with a smaller number of lenders.
On the other hand, a company may wish to refinance debt to take advantage of changes in interest rates, which may allow them to reduce the costs associated with their borrowing.
Another reason for refinancing is to remove uncertainty about availability of capital. A company may wish to change its debt maturity profile by extending the term of its borrowing, for example. There is a considerable skill involved in knowing when is the most advantageous time to access longer term finance. Done right, accessing longer term finance could free up more capital for reinvestment in the business.
Debt refinancing may also be needed if a company has built up large credit positions, for instance with suppliers and other creditors, such as HMRC.
Is debt refinancing right for your business?
When seeking debt refinancing, it is important to take into account each of the debt refinancing considerations that can affect its suitability, cost and other factors that could impact your business. These include:
- Your debt status. You need to understand what you owe, to whom and on what terms.
- Your credit risk. The credit history of your business and future impact on your credit may make debt refinancing unsuitable for your business.
- Can you consolidate your debts? This makes it easier for you to see what your business owes and when. It is also a way of reducing the number of negotiations.
- What is the debt market like? Interest rates, which have been at a historically low rate for some time, may be in your favour.
- Do you require long-term finance? Debt refinancing can be suitable for short-term and long-term financing. Lengthening the terms of your loans can be a way to reduce your monthly outgoings. Most facilities are still offered on a five-year or shorter timeframe.
Advantages of debt refinancing
- Enables you to flexibly manage your business finances.
- Could offer you better interest rates.
- Aids your businesses cash flow.
- Easier to manage your debts.
Disadvantages of 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 their advisers.
- There are sometimes costs associated with debt refinancing. Some lenders will impose an early repayment charge if you pay off your debt before the end of a fixed term, for example.
- Debt refinancing may require making judgements about future movements in interest rates and other factors. Depending on the nature of your business debt, this may be a difficult skill that requires experience and knowledge of the debt markets.
Where BGF comes in
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. 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. BGF has provided equity funding to more than 400 small and mid-sized businesses in the UK and Ireland.
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.
How we can help
As the largest growth investor in the UK and Ireland, BGF has invested in about 400 small and medium-sized businesses, deploying a total of around £2.5 billion of investment. Our teams are spread across the UK and Ireland in a network of regional offices.
We have broad sector expertise, investing in everything from high-growth online businesses to advanced manufacturing companies and start-ups developing life-saving medicines. If you’re interested in what we have to offer, please contact us today.Find out more
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