The terms ‘debt refinancing’ and ‘debt restructuring’ are often used interchangeably, but they are quite different in purpose, advantages and risks.

Understand the Impact of Debt Refinancing vs Restructuring

August 4, 2023

The terms ‘debt refinancing’ and ‘debt restructuring’ are often used interchangeably, but they are quite different in purpose, advantages and risks.

How debt refinancing differs from debt restructuring

While refinancing and restructuring involve reorganising debt, refinancing usually occurs when a business has their finances under control and wishes to improve their situation with a new loan contract with more favourable terms.

Debt restructuring, on the other hand, happens when a business or borrower is in financial distress and is unable to meet the repayment conditions of their existing loan contract. They must negotiate with the lender to secure more lenient terms on an existing contract.

When should you consider refinancing?

If your business has a large loan, such as a mortgage on a property or working capital finance, you might consider working with your broker to see if you can obtain a lower interest rate. This may be more likely if market interest rates are falling, or you have improved your credit rating. The refinancing process entails a new loan, with a new contract, being used to pay off the remainder of the existing loan.

If you have built up substantial equity in a mortgaged property, you might choose to refinance for a higher amount than the remaining loan balance. This turns equity into cash, which could be used to expand or grow your business.

Alternatively, you could refinance to consolidate several debts into one more manageable loan or switch a fixed interest rate for a variable rate.

Refinancing: Benefits vs. risks

The main benefits of refinancing are paying a lower interest rate during the remaining life of the loan and creating access to cash.

However, a fixed-term loan may have an early repayment penalty fee. There may also be an establishment fee on the new loan. Your broker can help you calculate the likely costs.

When should you consider restructuring?

If you are unable to meet your loan repayments on time, you may need to consider debt restructuring, especially if you are otherwise risking bankruptcy or business liquidation.

Contact your broker to discuss possibilities such as extending the loan term or making repayments at longer intervals. Lenders may be prepared to consider these options rather than risk debtor bankruptcy or liquidation, which might see them unable to recover the loan principal.

Restructuring: Benefits vs risks

The most obvious benefit of a successful loan restructure is avoiding bankruptcy or liquidation. Even in less extreme cases, a loan restructure could improve your cash flow and give you some breathing space to get back on your feet financially.

However, loan restructuring should only be considered if it is really needed, as it is likely to have a downward impact on your credit score, making it more challenging to get a loan in the future.

Tailored finance planning for your business

Your broker’s expert knowledge can help your business benefit from a customised business finance solution. Contact us for guidance if you are considering debt refinancing, restructuring or are looking for ways to fund business growth.

This information is for general information purposes only. The information contained herein does not constitute financial or professional advice or a recommendation. It has not been prepared with reference to your financial circumstances or business and should not be relied on as such. You should seek your own independent financial, legal and taxation advice as to whether or not this information is appropriate for you.

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