Refinancing business debt: what the numbers show

Refinancing gets discussed almost entirely in terms of the interest rate, which is the least interesting thing about it. Rate is one line in a comparison that usually has five. Term, structure, security and the cost of moving all change the answer, and two of them regularly change it in the opposite direction to the rate.

The five things that actually move

• The rate. The obvious one, and the one most likely to have been the reason someone raised it.
• The remaining term. Resetting a facility with four years left back to ten cuts the annual repayment sharply, and increases the total interest paid over the life of the debt.
• The structure. Several short facilities consolidated into one longer one frees annual cash, which is often the real objective rather than the rate.
• The security. Moving from unsecured or equipment-backed lending to property-backed lending usually lowers the rate and raises what is at stake if things go wrong.
• The cost of moving. Break costs, discharge fees, establishment fees, and the lender's own assessment and legal costs. Real money, paid up front, against a benefit that arrives monthly.

The two positions, side by side

Here is a business with three facilities, shown as it stands and as one consolidated ten-year facility would look. Nothing about which is better; just the two positions.

How to read that table

The consolidated position frees roughly $150,000 of cash a year and moves cover from 1.26x, which is tight, to 2.86x, which is comfortable. If the business needs headroom to fund a growth move, hire, or simply to stop running the bank account to the wire every quarter, that is a material change.

It also pays roughly $215,000 more interest across the life of the debt, plus $19,000 to get there. That is the price of the headroom, and it is not a hidden catch. It is the arithmetic of stretching the same principal over a longer period.

Neither of those facts settles the question. A business that is comfortably profitable and does not need the cash is buying headroom it will not use. A business that is one bad quarter from breaching a covenant is buying something quite valuable. The same table supports both conclusions, which is exactly why we show it rather than draw one.

The things that get missed

• Break costs on fixed-rate facilities, which are not a fee but a calculation, and can be large when rates have moved against the lender.
• Cross-collateralisation. Consolidating often means one lender takes security over everything, including assets that were previously unencumbered.
• Covenants attached to the new facility that were not in the old ones, particularly leverage ceilings and reporting obligations.
• The credit enquiry itself. Shopping several lenders in a short window leaves a trail, and a decline sits on the file.

Where we fit, and where we do not

We model both positions from your actual financials so you can see them properly: the covenant maths, the stress tests, and what the consolidated structure does to your capacity for whatever comes next. That is analysis, and our fee is the same whichever position looks better.

What the review will not do is tell you to move. It sets out the position and what a restructure would change, and the decision stays with you. Where you decide to move and want us to take it to market, we do that on a separate fee, and we say in writing that a lender may pay commission on it. Where you would rather use your own broker or bank, the work is yours to take to them at the same price.