Refinancing business debt

Refinancing replaces existing business debt with a new loan, at a lower rate, over a longer term or as one payment in place of several. A longer term cuts the monthly cost but can raise the total you repay, and early repayment charges on the old debt add to the bill. When the old debt is cleared, get its personal guarantees and charges formally released.

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How refinancing works

A new lender pays off your existing lenders and you then repay the new lender. The new loan can carry a lower rate, run over a longer term, replace several payments with one, or sit on different security. Refinancing can also release cash. If the business has paid down a loan secured on property that has risen in value, a new loan against the property can repay the old one and leave money over.

Consolidation is refinancing several debts into one. Short-term loans, a merchant cash advance, a credit card balance and an overdraft that never clears can be replaced by one term loan on a fixed schedule. That makes the cash flow predictable. The amount owed stays the same, and the cost depends on the new rate and term.

A lender assesses a refinance as it would any new loan. It checks affordability, the credit record and the security, and it asks why the existing debt is being replaced. A lender will look harder at a refinance made because the business cannot meet its current repayments, and may want a plan showing how trading will recover.

Reasons to refinance

A lower cost

A stronger balance sheet, a longer record or better security can earn a lower rate than the business had when it first borrowed.

A lower monthly payment

Spreading the balance over a longer term frees cash each month, at the price of more interest over the life of the loan.

A better structure

Matching the term to the asset, replacing costly short-term debt, or agreeing a smaller personal guarantee as part of the new terms.

Consolidating three debts into one loan

Illustrative example

A company owes £95,000 across three loans at assumed rates. It replaces them with one £95,000 loan over five years at an assumed 9% a year. An assumed early repayment charge of 2% applies to Loan A.

Loan A: £40,000 at 14%, 24 months left
£1,920.52 a month
Loan B: £25,000 at 16%, 18 months left
£1,571.41 a month
Loan C: £30,000 at 11%, 36 months left
£982.16 a month
Current monthly total
£4,474.09
Still to pay on the old loans
£109,735.57
New loan monthly repayment
£1,972.04
Total repaid on the new loan
£118,322.62
Early repayment charge on Loan A
£800.00
Extra cost of the five-year refinance, including the charge
£9,387.05

The monthly cost falls by £2,502.05, which may be what the business needs while it grows. Over four years the new loan would cost £2,364.08 a month and £113,475.79 in total, £3,740.22 more than the old loans before the charge. Compare both measures in the loan comparison calculator.

A person signing a document at a desk

Releasing personal guarantees and charges

Repaying a loan does not by itself end the personal guarantee that supported it. An “all monies” guarantee can stay in force for any other debt the company owes the same lender, and some guarantees stay live until the lender releases them in writing. When the old lender is repaid, ask for a written release of each guarantee and keep it with the company’s records.

Charges work the same way. A debenture or a mortgage over property stays on the Companies House register as outstanding until form MR04 is filed to show it is satisfied. The new lender will want the old charges cleared so that its own ranks first, and future lenders and buyers will check the register. Ask the old lender for a release and file the MR04: removing a satisfied charge sets out how.

If you refinance with the same lender, negotiate the guarantee as part of the new terms. A business that has grown and repaid debt has a case for a lower cap or for no guarantee. What a personal guarantee means for a director covers what to ask for.

Before you refinance

When refinancing does not help

Refinancing costs money if the early repayment charges are larger than the interest saved, or if a longer term adds more interest than a lower rate removes. Put both figures in pounds before you sign. A new loan secured on property or a debenture, replacing unsecured debt, also puts assets at risk that were not at risk before.

If the business is losing money, refinancing postpones the shortfall. A lower payment buys time to fix the trading, and the plan for that time matters more than the new loan. Where the pressure comes from tax, a time to pay arrangement with HM Revenue & Customs may help. A Start Up Loan cannot be used to repay debt; repaying debt is one of the scheme’s excluded purposes.

Check the old agreements for notice periods and fixed-rate break costs before you approach a new lender. Repaying a business loan early covers the charges you may face, and why a business loan is declined covers what to fix if a refinance is turned down.

Business loan comparison calculator

Two loan offers side by side: the monthly payment, the total repaid with fees, and the difference in pounds.

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Questions people ask

Can I refinance a business loan with a different lender?

Yes. The new lender pays a settlement figure to your existing lender on the day the new loan completes, and you repay the new lender from then on. Get the settlement figure in writing, check the early repayment charge, and make sure the old lender releases its charges and guarantees once it is paid.

Does refinancing reduce what my business owes?

No. It replaces one debt with another of the same size, plus any charges and fees added to the new loan. It can reduce the interest you pay if the new rate is lower and the term no longer. A longer term lowers each payment but can increase the total you repay, so compare the total in pounds before you decide.

Can I consolidate a merchant cash advance into a loan?

Yes, if a lender will advance enough to settle it. Ask the provider for a settlement figure: some advances charge the full agreed amount even when settled early, so the saving comes only from the cost of future funding. A term loan replaces a share of your card takings with a fixed monthly payment.

Does repaying a loan release my personal guarantee?

Not always. A guarantee limited to one loan should end when that loan is repaid, but an all monies guarantee covers every debt the company owes that lender. Ask the lender for a written release once the loan is cleared, and keep it. A guarantee that has not been released can be called on later debts.

Will refinancing affect my credit file?

The new lender will search the company’s file and usually the directors’ files, and those searches are recorded. Clearing several debts into one can make the company’s file look simpler to future lenders. Missed payments on the old debts stay on record after the refinance.

When is the right time to refinance business debt?

When the business can show a stronger position than when it first borrowed: a longer trading record, higher profits, more security or a clean payment history. Look again when a fixed-rate period or an early repayment charge period ends, because the cost of leaving falls. Refinance before cash runs short, while every account is up to date, so lenders assess a growing business and the choice of lenders stays wide.

Finance is subject to status and to the lender’s terms. A personal guarantee makes you liable for the company’s debt if it does not repay, and it can be enforced against your own assets, including your home. Nothing here is a personal recommendation.

Business loans

Business loans

Term loans, secured and unsecured lending, government-backed schemes and how to compare offers.

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Secured business loans

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Unsecured business loans

Borrowing without a charge over company assets, and the personal guarantee lenders ask for in its place.

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Merchant cash advance

The provider is repaid from a share of your future card takings, at a cost set by a factor rate.

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Funding searches run on Swoop’s platform. Swoop Finance Limited is a credit broker and not a lender, and is authorised and regulated by the Financial Conduct Authority (FRN 936513). Buzz Accounting Ltd introduces businesses to Swoop and may receive a fee from Swoop when funding is arranged. Business funding is separate from the financial advice Equity & General Financial Services Limited gives through this website. Finance is subject to status, and a lender may ask a director for a personal guarantee.

Cover for a personal guarantee

If a lender asks you to guarantee the company’s borrowing, our advisers can advise on life cover for that debt.

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