Understanding business re-financing

Getting your head around the world of re-financing can sometimes be difficult. Once understood though, it can prove an extremely useful tool for SMEs.

In simple terms, business re-financing is the conversion of original debt, containing outstanding and overdue amounts, into an entirely new debt from a new lender. By paying off the old debt under a revised set of obligations, businesses can consolidate all the money they owe into one instrument and obtain better interest rates in the process. With short-terms loans now converted into longer-term debt, companies can also improve their cash flow and increase the availability of working capital.

Aside from the immediate benefits of increased liquidity, business re-financing is also important for the overall image and reputation of a company. Paying off creditors will improve trust, whilst also re-establishing relationships between key suppliers and reducing the chances of litigation.

Deciding when to re-finance is crucial. Before making any commitments, businesses and their directors should have a clear idea of their future plans and objectives and, most importantly, a solid financial plan. With these prerequisitites in place, lenders will be in a much better position to approve the most appropriate type of finance with the most favourable terms. What’s more, it’ll make the whole process of re-financing a much more simple and straight-forward procedure.