Looking to refinance your debts? Know your options | BDC.ca
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Looking to refinance your debts? Know your options

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Whether you're facing rapid growth, dealing with seasonal sales fluctuations or looking for additional capital, refinancing your debts may be a good option to help you reach your goals.

Simply put, refinancing enables you to restructure your debts to obtain better payment conditions. You can also leverage your assets to obtain more working capital. Because of its wide range of applications, it can benefit successful companies as much as those in difficulty.

Analyze your financial situation

Before you consider refinancing, the first step is to look carefully at your balance sheet and cash flow statements to see how much debt your company has and how much it’s costing you.

If you have a cash-flow problem, you need to show how you plan to avoid a recurrence of this situation. Present conservative financial forecasts to include different scenarios, i.e., best-case and worst-case.

Remember that refinancing is only one of several options when evaluating your financial situation. Depending on your needs, equity financing, growth and transition capital or a term loan might better suit your business.

Know your refinancing options

Once you've carefully assessed your financial situation, take a look at some of the most common scenarios where refinancing could help your business. Keep in mind that when you refinance a business loan, you may incur some additional costs.

Lower your interest rates

You may be eligible for a lower interest rate on your loan because rates have dropped since your negotiated your loan. Alternatively, your company may be showing consistent and strong financial performance, which means you could present a lower risk for a lender. This gives you the power to renegotiate a better interest rate.

You may also want to change from a floating interest rate to a fixed rate. If you are looking for peace of mind, a fixed rate provides the same payments for the term of the loan. A floating rate should mainly be considered if variations in your interest payments do not seriously impact your financial viability.

Refinance to consolidate debt

You can consider consolidating a number of debts by refinancing. Essentially, you could get one long-term loan and one easier-to-manage payment per month.

Businesses can also combine larger loans in order to diminish their monthly payments by extending the repayment period of the total debt over a longer period of time.

Leverage assets for special projects

Another refinancing option is to leverage the equity of your fixed assets. This basically means using your buildings or equipment as collateral on loans to get more cash. Refinancing your assets will give you more cash to support projects such as expanding into new markets, restructuring your company or conducting R&D and product development.

Deal example: Leveraging assets for special projects

ABC Co. is a provider of car insurance, home insurance, life insurance, travel insurance and commercial insurance products.

The company owned an existing building as well as an empty lot that it wanted to leverage to finance the construction of an office building. At the same time, the business wanted to refinance existing loans on its building to improve its terms and conditions.

Loan purpose
Construction of an office building (including contingencies)
$5.5 million
Refinancing existing loans
$1.5 million
Total
$7 million

In this example, ABC Co. refinanced existing loans and increased the amortization from 17 to 25 years on Loan—02. The building pledged as a collateral for Loan—02 was financed at 40% of its value and also partially guaranteed Loan—01. By refinancing the existing building, ABC Co. was able to restructure its debts to improve its cash flow for growth and construction of the new building.

Funding
Loan – 01
$5 million
Loan – 02
$1.5 million
ABC Co. investment
$500, 000
Total
$7 million

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