Growing
Should you refinance a business loan? Do the sum before you switch
Refinance a business loan only when the saving beats the cost of switching. How to do the sum, and what changes now Bank Rate is 4%.
It is worth trying to refinance a business loan only when the money you save is bigger than the cost of switching. A lower rate is the start of the sum, not the answer. Early repayment charges, new fees and a longer term can wipe out the saving, so add them up before you apply.
The question is live again. The Bank of England raised Bank Rate to 4% on 5 November. If your loan has a variable rate, your repayments may already be going up.
Section 01
What does it cost to refinance a business loan?
Refinancing means a new loan pays off the old one. You then repay the new lender instead. Three costs come with the switch.
Early repayment charges
Your current lender may charge you for paying off early. Check your loan agreement for the exact figure. It is often a percentage of what you still owe.
Arrangement fees
The new lender may charge a fee to set up the loan. Ask for it in writing before you commit.
Legal and valuation costs
These apply mainly to secured borrowing, such as a commercial mortgage. They can run to several thousand pounds.
Here is a simple example with round numbers. Say you owe £200,000 over five years at 9%. Over those five years you would pay about £49,100 in interest.
Move the same balance to 7.5% and the interest falls to about £40,500. That saves around £8,600. Now take off a 2% early repayment charge of £4,000 and a 1.5% arrangement fee of £3,000. The real saving is about £1,600 over five years.
So, is a switch like that worth it? Only just. A rate cut of 1.5 points sounds large, but most of it went on fees.
Section 02
Fixed or variable now Bank Rate is 4%?
A variable rate usually moves with Bank Rate. On a £200,000 balance, each 0.25 point rise adds roughly £500 a year in interest.
The Bank of England voted 8 to 1 for the latest rise. One member wanted a bigger increase. The Bank expects inflation to reach about 5% by mid-2027, and its next decision is due on 17 December.
A fixed rate takes that risk away. You know the repayment for the whole term. The trade-off is that fixed deals often carry higher early repayment charges, and you will not benefit if rates fall.
Fixing makes most sense when a rise in repayments would hurt your cash flow. If you could absorb a rise, the extra certainty may not be worth paying for.
Section 03
Refinancing to free up cash flow
Some owners refinance to lower the monthly payment rather than the rate. They do this by spreading the loan over a longer term.
It works, but it costs more. Take the same £200,000 at 7.5%. Over five years the monthly payment is about £4,010. Over eight years it drops to about £2,780.
That frees up about £1,230 a month. But total interest rises from about £40,500 to about £66,600. You pay roughly £26,000 more for the breathing space.
That can still be the right call. A longer term makes sense when the extra cash goes into something that earns more than it costs. It does not make sense if it only delays a problem the business cannot afford.
If you have several loans rather than one, read when one loan beats three. Combining debts is a different decision with its own checks.
Section 04
When will a lender say no?
A new lender assesses you from scratch. It does not matter that your current lender said yes a few years ago.
- Trading history: Most growth lenders want at least 12 months of trading accounts. Two years opens up more unsecured options.
- Affordability: The lender checks that your profits cover the new repayments with room to spare.
- Your repayment record: Missed or late payments on the current loan make a switch much harder.
- Guarantees and security: Unsecured borrowing above £25,000 usually needs a personal guarantee. Larger loans may need security over assets.
Refinancing will not fix a business that cannot afford its debt. If repayments are already a struggle, talk to your current lender first. It may agree a payment break or a longer term without a full switch.
If the sum does work, a broker can test it across a wider range of lenders than you could approach alone. You can read how we arrange growth finance for established businesses. You pay bizbritain nothing unless a lender on our panel issues an agreement in principle.
This guide is general information, not financial advice. Applications are subject to status, affordability and lender criteria.
Read the guide · ready to talk?
Got a question the guide didn’t answer? Talk to an advisor.
We’ve arranged growth finance for thousands of British businesses. If you’ve read the guide and you want to see what £25k to £10m from 100+ lenders could do for yours, our advisors are on the phone now.