Refinancing your business assets, like equipment or fleet vehicles, is a critical practice for many organizations. Refinancing is an effective way of negotiating your current financial terms and sorting out ways to make your payments work for your business. This can mean beefing up your monthly premiums to reduce borrowing time, or increasing the term of your borrowing to result in lower monthly payments, effectively increasing your available working capital.
We can help to make sense of this process by breaking down what each refinancing plan will mean for you and your organization.
What is Refinancing?
Put simply, refinancing is trading in your old loan for a fresh one with new terms that include an improved interest rate and duration of a repayment period. Borrowers can elect to receive a new financing plan from their current financial institution, or refinance a loan with a totally different lender.
Refinancing is completed by essentially paying out the first loan and making a new agreement. You may decide to refinance your existing loan parameters to take advantage of a better interest rate that results in a reduced monthly payment, consolidate other debts into one loan, or to free up capital – usually by increasing the length of the term.
In the below illustration, we can see first-hand the savings that can be realized when refinancing is investigated at different times during the timeline of a loan. At 18 months, the new refinanced rate was capable of saving this particular borrower close to $1,800/month at an annual savings of $20,880.00 over the course of 54 months.
When refinanced again after using equipment for two years, a monthly saving of almost $2,300 is realized, at an annual saving of over $27,000.00
This is a prime example at how refinancing can free up valuable resources that can be invested elsewhere in a business.
In another example, we can see how a reduction in interest rate of 2.31% can mean an annual savings of $6,838.00.
Benefits for Business Owners
Refinancing offers many overall benefits to business owners, with the biggest one being the ability to significantly lower interest rates when compared with a current loan. When your business is able to reduce its monthly payments, you benefit from having more money available for operating expenses, allowing your business to grow by allocating funds to segments that need the additional cash flow. Further, the reduced interest rate helps businesses to meet obligatory monthly costs like employee salaries, supplier fees, and others.
Refinancing a fleet of vehicles or construction equipment, for example can pave the way for increasing working capital to expand the fleet and grow your business. Or it may allow you to purchase a new piece of instrumental equipment that helps position your business for future growth in a new direction.
Refinancing can also benefit businesses by putting financial goals into perspective, spurring new initiative to pay off existing debt, and to minimize monthly spending. It can be profitable to refinance in the face of an uncertain market. Making the move from an adjustable rate loan to a fixed loan can eliminate the possibility of increased payments when loan rates inevitably reset.
Not all businesses pursue a refinanced loan agreement because of financial stress – when stock climbs enough to attract new business, trading some equity for a debt reduction is a great way for businesses to reduce debt-to-credit ratios which can open the door for new financial opportunities down the road.
Once you’ve set your financial goals, you can begin to look at different financing agreements. Things to consider include:
Current business loan rates: If your current rate is lower than the refinancing rate you’ve been presented with, it may prompt you to shop around at different financial institutions for a favourable rate. On the other hand, it may be a perfect time to consider refinancing if the new rate is at least one point lower than your current agreement.
Equity: Having equity built up in your business is important for ensuring you’re in the best possible position prior to a possible refinancing discussion. Having equity usually helps a business achieve a more beneficial loan rate.
Credit Score: In times of economic uncertainty, lenders will be ever-watchful of higher credit scores. If you’re investigating the possibility of refinancing, clear up any negative strikes against your business in your credit report that could affect the terms of your refinancing interest rates.
Communicate with your Financing Institution: Opening the doors for discussion enable you to build knowledge about the current financial market, loans and rates that may be available to your business, and where you stand financially. Communication is always beneficial.