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Four ways refinancing could help your business

Four ways refinancing could help your business

Refinancing can help small businesses uncover the resources to support growth or maintain continuity in financially challenging times. From securing a lower interest rate to freeing up cash for strategic priorities, here's a look at four key ways refinancing can help small businesses succeed.

 

Securing a lower interest rate

It's not just home owners who can benefit by refinancing. If you took out a business loan while interest rates were high, refinancing could help you secure a better deal. Even a one or two percentage point difference could save your business thousands in interest down the road.

While refinancing can provide many benefits, it's important to carefully weigh the pros and cons as part of your overall business strategy. For example, do you plan on keeping your business long enough to recover the new loan's establishment fees and other costs? Because the costs associated with refinancing can be significant, it's important to perform a cost-benefit analysis ahead of time. It's also a good idea to check your credit score and resolve any inconsistencies in your credit history before you apply.

Freeing up cash for strategic opportunities

Improving cash flow is one of the more common reasons for a business to consider refinancing. In addition to allowing you to obtain a lower interest rate, refinancing can help you secure a loan with more favourable terms and payment flexibility. This frees up more cash for your day-to-day business operations, while stretching out the repayment of the principal over the future.

While some businesses refinance to reduce their overall debt, refinancing at a higher loan-to-value ratio (LVR) against your security can help you access more cash for expansion and growth. In general, you can borrow more against a residential asset than a commercial one. The key is to ask yourself if want to increase your debt obligation (which can increase your risk over the long term) in order to pursue strategic opportunities now.

Consolidating financial processes

Do you find it challenging to manage your business's various bills with different due dates and interest rates? If so, refinancing could give you the opportunity to consolidate all your debts into a single payment, simplifying your budget and potentially reducing the amount you have to pay back each month.

Reduced payments could also be achieved by changing the type of loan you're on – for example, by switching from a fixed-rate principal and interest (P&I) loan to a variable-rate or interest-only loan. Again, the important thing to consider is how a particular loan fits with your short and long-term business goals.

Switching lenders to better meet your needs

As your business grows and evolves over time, so may your financial needs. Refinancing can enable you to make improvements to your business operations by providing access to a different mix of loan products and services better suited to your needs.

For instance, a business may want to switch lenders to access new products and services, such as an overdraft account to support a retail EFTPOS facility or an automated payroll system. Or perhaps your business has increased in value and you want to change the underlying security on your loan from your personal property to your commercial facility. Refinancing can give you the opportunity to make these changes, while improving your business operations in the process.

To ensure you're on the best possible arrangement for your business, it's a good idea to review your existing finance on a regular basis. In some cases, a conversation with your bank is all you need to negotiate a better rate or change the terms of your existing loan, as many lenders would rather work with you than lose a valuable client. When thinking about making this change, it’s worth speaking to a professional adviser for expert advice.

As always, it's important to consult with your financial advisor to make sure refinancing is the right step for your business. Learn how to develop your five-year plan to help your business stay on track.

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