Refinance and consolidate business borrowing

What it is

Refinancing means taking out a new facility to pay off existing borrowing, ideally on better terms. Consolidation is the version where several debts become one. The aim is usually a lower payment, a single bill instead of many, or moving off a product that no longer suits you. It is the borrowing equivalent of clearing a desk that has three months of paperwork on it so you can actually work.

When it makes sense

Consolidating stacked advances

Here is one we see a lot. A business takes a merchant cash advance, then a second to plug a gap, then a third, and before long several lenders are taking a slice of the daily card takings. That stacking can quietly choke a perfectly good business. There is barely anything left at the end of the week.

Refinancing those stacked advances into a single, properly structured facility can give you back room to breathe. Whether it saves money overall depends on the settlement figures on the existing advances versus the cost of the new facility, so we work that out before anything goes to a lender. If consolidating only moves the problem rather than fixing it, we will say so.

What the numbers look like

An illustration, not a client case, with round numbers. A café takes a £40,000 advance at a 1.25 factor (£50,000 to repay) and, six months later, a second £25,000 advance at 1.30 (£32,500 to repay) from a different funder. Together they are sweeping 25% of card takings of about £60,000 a month, which is roughly £15,000 a month leaving the business. With £20,000 left on the first and £22,750 on the second, the combined outstanding balance is £42,750.

A £45,000 unsecured term loan over 24 months at an illustrative 15% APR repays about £2,180 a month, £52,300 in total. The business goes from £15,000 a month to £2,180 a month leaving the account, and pays about £7,300 of interest on the new loan over two years for the room to breathe; against the £42,750 it would cost to settle both advances today, the loan costs around £9,500 more in total. Whether that trade is right depends on what the £12,800 a month of freed cash does: if it stops the third advance and the late-payment fees, it usually is.

One thing refinancing cannot do: the fee on a merchant cash advance is fixed at signing, so settling one early rarely reduces what you already owe. Ask each funder for a written settlement figure before you decide; on an advance it is usually the outstanding balance with no discount. What consolidation buys is a repayment the business can carry, not a cheaper version of the past.

The catches

A lower monthly payment can hide a higher total cost if you simply stretch the term. Existing facilities may carry early settlement charges. And a new application means a credit check. None of these rule refinancing out, but they all belong in the decision, which is why we put the real numbers in front of you rather than a tempting headline.

How it works

Common questions

Sources

• British Business Bank, business finance guidance
• FCA, consumer credit and business lending
• Bank of England, base rate
• Business Debtline, free business debt advice