How to refinance a business loan to raise capital

Refinancing a business loan means replacing an existing loan with a new one, usually to lower your monthly repayments, change the term, combine several debts or borrow more than you currently owe so you have extra capital to invest. The new lender repays the old debt and you then repay the new lender. It can free up cash for growth, but you should weigh early repayment charges, new fees and the total cost over the new term.

This guide is for UK businesses that already have borrowing and want better terms, lower repayments or extra capital. Smart Funding Solutions is a broker that helps businesses compare refinancing options with suitable lenders. If you are new to borrowing, our business finance guide explains the main products first.

01Why businesses refinance

• To raise capital: borrow more than the outstanding balance and use the difference for equipment, stock, hiring or expansion.
• To reduce monthly repayments: a longer term or better rate can ease cash flow.
• To consolidate debt: combine several loans, cards or advances into one repayment.
• To improve terms: if your trading or credit has strengthened since you first borrowed, you may qualify for a lower rate or fewer restrictions.
• To change the structure: for example, moving from a short-term facility to a longer-term loan, or releasing a personal guarantee where a lender allows.

02Ways to refinance and raise capital

Top-up or "cash-out" refinancing

You take a new loan larger than your current balance. The old loan is repaid and the surplus comes to your business. Lenders will want to see that the business can comfortably afford the larger repayments.

Asset refinancing

Asset refinancing releases cash from vehicles, machinery or equipment you own, or have part-paid, through a new hire purchase or sale and HP back agreement. You keep using the assets while repaying.

Secured refinancing against property

If your business owns commercial property, or directors are willing to offer property as security, a secured business loan can refinance existing debt and raise larger sums, often over longer terms. Your property is at risk if repayments are not kept up.

Debt consolidation

A debt consolidation loan replaces several debts with one. It can simplify repayments and sometimes reduce the monthly outgoing, though not always the total cost.

03Costs and risks to weigh up

• Early repayment charges: check each existing agreement. These can outweigh the savings from a new loan.
• New fees: arrangement, valuation and legal fees may apply to the new facility.
• Total interest: a longer term lowers monthly payments but can increase what you pay overall.
• Security and guarantees: a larger loan may require security or a personal guarantee.
• Credit searches: applying involves credit checks. Limiting applications to well-matched lenders reduces the impact.

Our guide to paying off a business loan early explains how early settlement typically works.

04Is refinancing the right move?

Refinancing generally makes sense when the new arrangement leaves your business better off after all costs, or when the extra capital will earn more than it costs. Work out:

1. The settlement figure on your existing debts, including any charges
2. The total cost of the new loan over its full term
3. The monthly repayment you can comfortably afford, including in quieter months
4. What the additional capital will be used for and the return you expect

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05What lenders look at

• Recent accounts and management figures
• Business bank statements, showing how existing debts are being paid
• Business and director credit history
• Details and settlement figures for current loans
• A clear plan for any extra capital
• Asset or property details, if offering security

Refinancing generally makes sense when the new arrangement leaves your business better off after all costs, or when the extra capital will earn more than it costs.

06The refinancing process

1. Review your existing agreements and request settlement figures.
2. Decide your goal: lower repayments, extra capital, consolidation or a mix.
3. Compare options across lenders, looking at total cost as well as rate.
4. Submit your application with accounts, bank statements and debt details.
5. On approval, review the agreement, sign, and the new lender repays the old debt and releases any surplus.

Decisions can come within a few working days once a lender has everything it needs, although secured and property-backed refinancing takes longer because of valuations and legal work.

07How we help you refinance