7 Common Refinancing Mistakes and How to Avoid Them

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Key Takeaways

Refinancing business loans can provide opportunities to secure better interest rates, terms, and repayment schedules.
It’s crucial to avoid some common refinancing mistakes to ensure you’re getting the most out of refinancing.
Failing to shop around, overlooking fees, and neglecting to review long-term goals are some of the most common mistakes, among others.
Adequate preparation, transparency with lenders, and a clear understanding of the refinancing process can help business owners maximise the benefits while minimising risks.

Refinancing business loans can be a strategic move for business owners, offering the potential to secure lower interest rates, more favourable terms, and a more manageable repayment schedule. However, refinancing is not without its risks, and making common mistakes can lead to unforeseen costs, prolonged debt, and missed opportunities.

This guide will explore some of the most common refinancing mistakes you can make and how to avoid them.

What is Refinancing?

Refinancing is simply taking out a new loan (either with the same lender or a different one) to cover an existing loan. This new loan ideally should have better terms and rates that fit your current situation. If you currently have a business loan that you’re finding hard to repay, refinancing is one of your choices to ensure you can manage it and avoid defaulting.

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.

Get Expert Advice on Refinancing

If you’re looking to get better rates and terms for your business loan, refinancing is a great solution for you. We can assist you so you can explore your options and find one that suits your business needs. Reach out today to learn more.

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Case Study: $1.1M Private Loan to a Commercial Construction Business

Prior to COVID, our client had a thriving commercial plumbing business. Like many in the industry, the pandemic hit hard, with reduced contracts and delayed payments leading to financial strain. However, as the market picked up again post-COVID, their numbers began improving steadily. Still, the burden of the pandemic remained in the form of costly, self-sourced loans that created a significant drain on their cash flow. On top of this, the business had accumulated $1M in tax debt. The client was faced with two potential solutions: consolidate their existing debts into a more manageable loan or consider restructuring the business entirely. With the future looking brighter for their business, consolidation became the preferred choice. Their turnover and cash flow were strong enough to support a $1.1M unsecured loan over five years. However, while loans of up to $250,000 can sometimes be obtained without the need for extensive documentation, larger loans – particularly unsecured ones – typically require financials. The company’s financials had taken a hit during the pandemic, and with losses on the books, the unsecured option was off the table. The Tailored Solution: Secured Loan with Capitalised Interest Recognising these challenges, we adopted a two-step approach to provide the client with the financial relief they needed. First, we secured a $1.1M first mortgage loan, backed by property as collateral. By securing the loan against property, we were able to access a more flexible and favourable lending option that allowed the business to maintain liquidity. One of the key features of this solution was the decision to capitalise the interest on the loan. This strategy meant that the interest accrued on the loan was added to the loan balance rather than requiring regular interest payments to be made. For the client, this provided two key benefits: Cash Flow Relief: By capitalising the interest, the client was able to redirect their available cash flow to more pressing business concerns, including paying down their $1M tax debt. This approach allowed them to stabilise their financial situation without the immediate strain of servicing both the tax debt and the loan simultaneously. Flexibility for the Future: The capitalised interest approach also created breathing space for the business to recover from its pandemic-related losses. By the time the interest needs to be repaid, the business is expected to be on even firmer financial ground, with stronger cash flow and better financials. This would enable them to refinance the loan or even explore unsecured lending options once their financial situation improves. Why This Loan Was the Right Fit In this case, the combination of a first mortgage loan with capitalised interest was crucial in allowing the business to address its immediate challenges while providing room for future growth. Here’s why this was the ideal solution: Secured Loan with Lower Interest Rates: By securing the loan against property, the business was able to access a loan with a lower interest rate than would have been possible with an unsecured loan. This ensured that the overall cost of borrowing was manageable, despite the larger loan amount. Avoiding ATO Enforcement: The capitalisation of interest gave the business the breathing space it needed to focus on paying off its tax debt. This is significant because it helped them avoid any potential enforcement action by the Australian Tax Office (ATO), which could have included garnishing accounts or placing liens on assets. 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Key Takeaways Doctors are considered low-risk borrowers by many lenders. Thus they have access to a wide range of financing options with competitive interest rates, flexible terms, and high loan amounts to support both business and personal financial needs. Some reasons why doctors need loans include purchasing commercial property, purchasing equipment, securing working capital, debt consolidation, further education, and more. Medical business loans are versatile loan products that can cover a range of business expenses, including staffing, marketing, and emergency expenses. Medical practice loans are ideal for doctors looking to acquire, expand, or renovate a medical practice. Medical equipment loans are for purchasing or leasing medical equipment, and helping doctors stay up-to-date with the latest technology without draining working capital. Doctors can access personal loans for managing personal expenses, debt consolidation, home improvements, or continuing education. 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