As a business owner or even just a consumer, I bet you’ve heard the term refinance before? But have you truly understood what it was or included? Well as a business owner refinancing can have many advantages, not only can you refinance existing business loans you can also refinance other business debt such as car finances. But what is refinancing? This is where you revise or replace your existing credit agreement, which is normally a business loan, business car finance etc. and seek to make it better and more favourable for the business, such as having a positive change to their interest rate, their repayment term, you could even refinance all your business debt payments into one which makes managing your cash flow a lot easier. As soon as a refinance has been approved the new contract will take place of the original contract.
Refinancing doesn’t always mean you need to get a loan from a bank, nowadays businesses are refinancing using their assets. A common type of this is when you can get a Loan secured against business machinery, vehicles or high-value items and as long as you pay your loan back on time (or earlier) and in full your assets will still remain yours. There are many advantages of this, such as being able to raise capital within the business without needing any business debentures, personal or business guarantees but still having the assets working within the company.
When deciding if you want to refinance or not, there are key things to know, such as the different refinancing options. The type of loan the borrower will choose will depend on why they are borrowing. Some of the refinancing options include:
- Cash-out refinancing – Cash-out Refinancing is very common when an asset in the business that is being used as collateral has increased in value. The cash-out process includes withdrawing the value or equity in the asset which then in exchange will give you a higher loan amount. Not only does this option give the borrower access to cash instantly without selling the asset, but it also still allows them to have ownership of the asset.
- Rate and term refinancing – This is the most common type of refinancing; this is when the original loan is paid and replaced with a new loan agreement that requires lower interest payments. Something to consider with this option is if you’re close to your end of term finance agreement, taking out a new agreement with a lower interest rate might cost more due to the duration of the new loan.
- Refinancing a car – Very similar to the rate to term refinancing, Car refinancing is where you replace existing car finance with another car finance. This could be to get lower interest payments; it could also be that you wish to upgrade or trade-in your current car, getting a new loan may also give you an additional loan amount you can put towards a new car which could make the payments lower, but you could also upgrade your car to something more expensive as you have a larger loan amount.
- Cash in refinancing – A cash-in refinance will allow the borrower to pay a portion of the loan for a lower loan to value ratio or to simply just get smaller loan repayments each month. For example, if you take out a loan and the repayments are three hundred pounds per month, you could also give an upfront amount of money to make the monthly payments only two hundred pounds a month.
- PCP refinance – Personal contract purchases are typically used for car loans (This type of refinancing can be used on other assets also such as expensive machinery). When a PCP is taken out and then the loan comes to an end there are many options to choose from. Since PCP finance splits the overall cost of the car and interest across a series of fixed monthly payments and the end of the term you can either have an optional final payment (which is also known as a balloon payment) this gives you lower monthly payments and allows you to be flexible with how you proceed at the end of the contract. You can either pay the optional final payment as stated above or you can choose to hand the car back with nothing to pay as long as you have stuck to the pre-agreed mileage limit and there is no damage on the car beyond the general wear and tear.
- Consolidation refinance – sometimes a consolidation refinance can be the best and most effective way to refinance. A consolidation refinance can be used when the borrower obtains a single loan at a rate that is lower than their current average interest rates of all their credit products (this could be loans, cars, credit cards) this type of refinancing will require the borrower to apply for the new loan at the lower interest rate and then pay off the existing debt with the new loan. Not only does this give you a lower interest rate on average but it also gives you just one monthly payment. This can make cash flow easier, also if you wanted to pay the loan off earlier you are just paying additional payments into one loan as opposed to a few different loans.
There are many advantages of refinancing but the main ones are below:
- You can get a lower monthly payment and interest rate. Saving you money
- You can convert an adjustable interest rate to a fixed interest rate, gaining predictability and savings.
- You can acquire an influx of cash for a pressing financial need.
- You can set a shorter loan term, allowing you to save money on total interest paid.
From all the information above it is clear that most businesses will refinance to save themselves money or to get initial cash to build on their capital. Speak to Origin Finance to find out what is available to your business.