Published: September 15, 2023
It’s been a turbulent few years for a lot of business owners, with many exploring different options to help them navigate through the economic uncertainty.
Refinancing has been one option many have pursued, be that to consolidate debt or create new opportunities.
Matt Conroy is the Regional Director for the South at Unity Trust Bank. He was invited to share his thoughts on what to consider when looking to refinance in September’s edition of South West Business Insider:
There are a number of circumstances that could prompt a business to refinance. For example, a business could be coming to the end of their commitment period with their current funding provider. Or, their fixed rate period could have expired and they wish to explore new finance options on the market.
Refinancing is not only for those businesses struggling with a debt. One factor which may result in refinancing is the relationship the business shares with its existing funder. If they no longer have a positive working relationship, refinancing will give them the opportunity to start afresh with another financial partner. Or it could be driven by more practical financial needs. For example, if a business wishes to refinance and effectively renegotiate their loan term so that future repayments will be reduced.
Absolutely. Another common trigger for refinance is when an organisation is growing via acquisition and leverages existing assets to support that growth. An incoming lender will often be willing to rely upon existing and newly acquired assets as security for the increased borrowing, enabling growth plans to be achieved with minimal cash input from the borrower.
There are a wide variety of refinancing options available to businesses. Terms will vary depending on the loan amount, the length of term, what the finance is being used for and whether it is a secured or unsecured loan.
To determine which best suits their circumstances, it’s important to critically review the lending terms. Each potential lender will provide a different set of terms. So, the borrower must review these and negotiate as appropriate – either directly or via their broker – to reach a final agreement that suits both parties.
If obtaining indicative terms from more than one lender, then a discussion with any shortlisted lenders can help to hone some of the terms and conditions, leading to a facility that is most likely to work well for all parties.
Beyond the headline pricing of a loan there can be significant differences between individual lenders in their approach to financial covenants and other ongoing conditions.
As a socially-responsible bank, our lending helps organisations to grow and make a positive difference to their communities by delivering social, economic or environmental impact. As part of this commitment, all of our lending – including refinancing – must align to one or more of the United Nations’ Sustainable Development Goals (SDGs) to ensure the investment will contribute to tangible impact.
Most of our lending packages are backed by property, whether it be residential, commercial or industrial. As a bank, we need to understand the type, location and value of the property, and whether it will serve the needs of the borrower going forward. We’ll also assess the historic, current and forecast financial performance of the business. Then, we can determine whether the organisation is in a strong position to meet its commitments.
All of our borrowing customers also benefit from Unity’s dedicated team of Relationship Managers. Based across the UK, they have specialist sector knowledge and experience. When a customer borrows from us, one of our experts will take the time to understand their organisation and its requirements. That way, we can provide the right finance package.
Typically, our lending is in the form of a secured loan with repayments of capital and interest over an agreed term of up to 20 years. We may include a period of interest only repayments at the outset if there is a justified need.
It’s clear that businesses are navigating a challenging period. A variety of factors are impacting financial performance as well as growth – from supply chain issues to across the board increases in input costs. Despite this, we’re still seeing a strong and consistent pipeline of enquiries, with no reduction in refinancing opportunities. It’s evident that there is still a keen appetite from customers. The marketplace is in the position to respond if refinancing is their preferred option.
Rapidly rising interest rates will continue to be a key concern for businesses. When we consider loan applications, it’s important for businesses to demonstrate their financial resilience in the event of further rate rises. They need to show that they are in a robust position to respond to market fluctuations. And for businesses that may need to explore new avenues to either protect current or future growth / business performance, then refinancing packages can be a helpful solution.
Refinancing can offer many benefits to a business, but it’s important to understand some of the challenges too. Firstly, you shouldn’t underestimate the time and investment that’s required when a business is going through a refinance. It’s a long and thorough process and can be a major distraction from the daily activities of the business. So, the team’s capacity and resource for this should be a key consideration.
In addition to this is the cost involved in the process. A refinancing package may provide savings on repayments or the interest margin. However, you’ll also have fees to cover including legal and valuation costs incurred. So, this must be measured carefully to ensure you’re getting the most financial benefit.
The information contained in this article is for general information only. It does not constitute any form of advice or recommendation made by or on behalf of Unity Trust Bank.