7 Common Refinancing Mistakes and How to Avoid Them

1. Focusing Only on Lower Repayments

Many businesses seek refinancing to make loan payments more manageable. However, focusing solely on lower payments is one of the most common mistakes you can make. It’s crucial to also think about the total cost of the loan over its entire term. 

For instance, you’ll end up spending more over time if you extend the loan term without a significant change in the interest rate. When seeking refinancing options, make sure to calculate the total cost of the new loan, ensuring that you’ll save more in the long run and not just in your monthly payments. 

2. Overlooking Fees

When refinancing a business loan, it’s important to consider all other costs besides the interest rate. Lenders often charge various fees, such as application fees, potentially break fees (if you have a fixed-rate loan), and other fees, which can add up quickly and offset any potential savings from a lower interest rate.

Before committing to refinancing, carefully review all associated fees and costs. Some lenders may offer lower interest rates but charge higher upfront fees, while others may have more favourable fee structures but slightly higher interest rates.

3. Not Exploring Options

One common mistake business owners make when refinancing is failing to shop around and explore multiple lenders and loan options. Each lender has its unique criteria, interest rates, and terms, and settling for the first option presented can result in missing out on more favourable deals.

To avoid this pitfall, it’s important to take the time to research and compare offers from various lenders, including traditional banks and private lenders. This process can be time-consuming, but the potential savings in interest rates and fees can make it well worth the effort.

4. Neglecting Long-Term Goals

Refinancing a business loan should align with your long-term goals and financial needs. Many business owners fail to consider how the new loan terms and repayment schedule fit into their overall business strategy.

Before refinancing, take the time to assess your long-term goals and financial projections. Consider factors such as:

• Anticipated growth or expansion plans
• Cash flow requirements
• Potential changes in business operations or revenue streams
• Exit strategies

Failing to account for these long-term considerations can lead to a refinancing deal that may initially seem attractive but ultimately hinders your business’s financial flexibility and growth potential.

5. Refinancing Too Often

Although refinancing is a great solution for business owners, some may make the mistake of refinancing too often, which can lead to several negative outcomes. Frequently refinancing can lead to increased costs and an increased outstanding loan balance.

6. Not Knowing Your Terms & Conditions

Overlooking the details in loan agreements can lead to unexpected terms or conditions that might not be favourable in the long run. Here are some things you should pay attention to:

• Fixed vs. Variable Rates: Determine whether the interest rate is fixed or variable and understand how it may change over time. If fixed, pay attention to the length of the fixed period.

• Fees and Costs: Pay attention to all fees associated with the new loan.

• Penalties: Understand if you receive a discount for paying out your existing loan early or if you’ll be hit with the full loan’s interest.

• Definition of Default: Read bout the specific conditions under which the borrower would be considered in default. Take note of the penalties, rate increases, and other consequences in the case of default. 

7. Not Seeking Professional Advice

Not consulting with financial experts can lead to uninformed decisions when refinancing. Professional advice can help you understand the full implications and what options are available for your specific situation.