Refinance a Business in 4 Steps

Bryan Brulotte - Unity. Prosperity. Compassion. #CanadaUnited

A sales downturn or rising costs can be stressful for a business owner. If the problems continue, you may even wonder if you can keep up with loan repayments. But all is not necessarily lost. You may still have options to refinance or amend loan terms before you miss a payment to the bank.

The first steps: Figure out the source of the problems, work out a turnaround plan and talk openly with your banker about the situation.

Step 1. Create a turnaround plan

Before you approach your bankers, it’s crucial to get a clear picture of your current situation and work out a solid turnaround plan. Start with three key questions.

  • What led to your problems?
  • What have you done to address these problems?
  • What do you still have to do?

Without these basics, banks are far less likely to work with your business to figure out solutions.

Banks also typically request:

  • financial statements
  • evidence of positive cash flow
  • cash flow forecasts
  • a history of debt servicing
  • average accounts receivable/payable durations
  • details on existing debt
  • a solid case for any additional debt requests
  • a personal guarantee

It’s the planning readiness that banks look for—a good explanation for the problem and good solutions being implemented. You have to substantiate the needs and benefits of any new loans, how you’re going to change your business and whether your solution is sustainable.

It’s common for businesses to seek refinancing without having a turnaround plan or a good idea of their current situation. Such companies are usually told to come back after they’ve done their homework.

You have to think carefully of what needs to be fixed or improved.  If receivables are old or suppliers are being stretched too long, then bankers will not be able to work with you.   If a company is six months or a year behind in their bookkeeping, then it’s almost impossible to get refinancing.

A business in extreme difficulty may be referred to a bank’s restructuring or recovery unit for specialized help.

Step 2. Refinancing isn’t a bail-out

When a business is refinanced, the terms of existing loans are typically changed to provide easier debt servicing. As well, the company is usually offered new debt, such as an equipment or working capital loan, to help execute its turnaround plan. “The new loan is not there to bail the company out, often it’s to help their growth.

Any additional financing usually requires assets to be offered as collateral. If there’s no tangible security, refinancing becomes more challenging.  When there are no tangible assets, a small amount of working capital financing may be available.”

Step 3. Amend existing loan terms

Refinancing isn’t the most common solution for businesses in difficulty. A much more frequent option is to amend the terms of an existing loan. For example, a business may be allowed to postpone principal repayments for several months, which provides temporary cash flow relief.

Such a step doesn’t involve amalgamation of existing loans or obtaining a new loan. Postponing loan principal payments can be recommended.  Often, a bank will permit borrowers have the ability to submit a request in amending loan terms.

Step 4. Line up additional investment

Refinancing or amended loan terms aren’t necessarily the right solution for many businesses in difficulty. Instead, some companies simply need more capital to implement a business plan or achieve positive cash flow.

Refinancing is not always the solution.  A business owner may need to work on their business or get more investment. They may have to inject more of their own money or seek outside capital to give the business more time and flexibility.

Ultimately, each business needs to operate in a manner that will prevent it from having to face financial difficulties.  This means planning for the worst, not taking on excessive debt, and managing costs.