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Refinancing means replacing one loan with another — a new facility repays the old one, and the company carries on with the new lender's terms. Done for the right reason, it cuts cost or fixes a mismatch between the loan and the business. Done for the wrong reason, it moves a repayment problem sideways and adds fees on the way past. Here is how to tell which one you are looking at.
The three legitimate reasons to refinance
- Cost. The company took an expensive facility when it had to, its position has since improved, and cheaper money is now available. Replacing dear debt with cheaper debt is the classic case — provided the full switching arithmetic works (below).
- Structure. The product no longer fits: a merchant cash advance eating a fixed slice of card takings when revenue has shifted online, or a rolling facility where a fixed schedule would suit better. Our guide to bridging loans, term loans and credit facilities maps the shapes.
- Consolidation. Several small facilities with overlapping repayment dates replaced by one loan with one schedule. Simplification has genuine value — but check the consolidated rate against what you are actually paying now, not against the highest of the old rates.
The arithmetic that decides it
A refinance is worth doing only if the total cost of the new loan is less than the remaining cost of the old one, after every switching cost. Get three numbers before anything else:
- The settlement figure on the existing loan — what it costs to clear it today, including any early settlement charge. This is often less than the sum of remaining payments, because settling early saves future interest; how much less depends on the lender's terms. See early settlement charges explained.
- The total amount payable on the proposed new loan — from its Key Information Sheet or equivalent, not from the advertised rate.
- Any fees on either side — arrangement or documentation fees on the new facility.
If settlement figure plus new total payable plus fees beats the cost of simply running the old loan to term, refinance. If it does not, the "better rate" is an illusion created by restarting the clock. Watch especially for a longer term dressed up as a saving: smaller payments over more months usually means a larger total.
Where we fit
Two straight answers about our own product. First, a company can apply to us while it has borrowing elsewhere — existing debt is simply part of the affordability picture, and repaying a dearer facility can be a legitimate business purpose. We assess the application fresh, on the company's trading, bank activity and credit file. Second, the boundary the other way: we do not consolidate other lenders' debts into an existing Credicorp loan as part of a top-up — a top-up is a further advance on its own merits, as explained in can I top up or extend my existing loan. And a short-term facility of weeks is the wrong instrument for refinancing long, large debts; the term mismatch makes the arithmetic fail almost by definition.
When refinancing is the wrong answer
If the reason for refinancing is that the current repayments are being missed, stop. Borrowing to service borrowing usually compounds the problem, and a refinance taken under pressure tends to be the most expensive kind. Talk to the existing lender about forbearance first — with us that is a Hardship Variation — and take free, independent advice from Business Debtline (businessdebtline.org, 0800 197 6026) before signing anything new.
Lending to a company for business purposes sits outside FCA consumer-credit regulation under Article 60B FSMA RAO 2001 and is not covered by the Financial Ombudsman Service or the FSCS — so the switching arithmetic above is yours to check, and worth ten minutes of anyone's time. Our current amounts, terms and costs are on our business loans page.