Refinancing likely happens for three reasons:
- Your fixed loan term is coming to an end in the next twelve months, and you're looking for new options
- Some internal events within your company changed your financing outlook: you want to speed up your growth, you've made progress with your product and want to push it now but you need a sales force etc...
- Some external events in the market beg quick refinancing solutions: your VC partners are not playing ball, interest rates fluctuate, or...heck, your main investor/bank just shut down or won't speak to you.
Depending on the context, refinancing your business might sound like one of these mundane things you know you should look into but never take the time to do (like say....going to the dentist in your twenties); OR refinancing might sound like the hottest item on the agenda. Whatever your needs are, you will find the appropriate info in this guide.
III. Common Pitfalls And How To Avoid Them
IV. When Is The Best Time To Refinance?
What is Refinancing?
Business refinancing is the process of replacing an existing business loan with a new one, often with different terms or a different lender. The goal of refinancing is typically to obtain more favourable loan terms, such as a lower interest rate or a longer repayment period, to reduce the overall cost of the loan, or to improve the cash flow of the business.
There are several reasons why a business might choose to refinance its loans. For example, a business might seek to refinance to take advantage of a drop in interest rates, extend the repayment period to reduce monthly payments or consolidate multiple loans into a single loan to simplify its debt management.
Easy as that!
Why Refinance Now
Refinancing your company is an option to consider if any of these scenarios apply to your current situation:
You Need to Delay Your Repayment
You have encountered an unexpected bump on the road or lost a big client unexpectedly? Some of your payments have been delayed, or maybe you expected a client to sign at a certain time, but the negotiations have stalled. Or perhaps your current lender doesn’t let you draw down the money from your deal anymore for reasons that escape your agency.
There are many legitimate reasons which can make you anxious about upcoming repayments.
Our team will help to pitch your lenders with the best available practice. They can help you refinance your debt so that your capital repayment holiday moves further away, making it the only time you want holidays moving further away from you.
You Want to Benefit from Improved Loan Terms in the Current Market
Loan term sheets are always evolving and might loosen up following the trends in practices. For example, today, private debt offers covenant-lite deals. This was not the case a couple of years ago.
You might have financed your company at a time when deals were easy to come by but had limiting warrants you don’t find appealing anymore.
Refinancing can help you profit from these improved Loan Terms, by renegotiating more advantageous deal terms.
You Need a More Flexible Facility
Your financial performance is below plan, and you’re looking to soften the covenants of your loan to make it “covenant-lite”. Though private debt funds were not renowned to perform covenant-lite deals, this trend changed around 2018, and it’s now a very common deal format.
Flexibility comes in all shapes and forms: is your current deal dictating how the money should be used? Maybe you want to use it for something else than growth, like buying shareholder's equity or making an acquisition.
You can change the terms of your existing debt deals and make them less covenant-heavy, or by having fewer ties attached to your money. At Fuse Capital, our team will help you find the most flexible deals there are.
You Need a Bigger Facility: Cashflow Solutions
Maybe the deal you signed prior seemed to fulfil the needs of your business. But your savvy projected your growth beyond what was expected of you. And now, you cannot hit your updated growth benchmarks with the current deal(s) you have. The ball is in your current lender’s court, but they are not reacting as you’d expect them to.
To step up your game and hit your untapped potential, you need investors that believe in your product/service and are able to fund it.
You feel stuck with this facility which you've so obviously outgrown.
You Want to Acquire A New Company
In a similar vein, you have spotted a company that would perfectly fit and complement your own operation: It has either a production asset, an expertise, or a patent you'd bet your house (but won’t) it would bolster your company’s value overnight.
You’re very keen on acquiring this asset, which could unlock tremendous growth for your company, however, the current tenure of your deal does not allow it. Hours on the phone and emails pitching your lenders won’t make them budge. Refinancing might be a good answer.
Lender/Bank Breakdowns
These scenarios are examples of partial relationship breakdown with your current lender, whereby they are not supportive of your current growth plans. However, total relationship breakdowns also happen, whether or not they start from one of the above scenarios.
They consist of a total rupture of contact between you and your current lenders, and/or the inability for you to further draw down your due share of the loan. This can bring about a stale situation and rapidly turn into quicksand.
You want to look into refinancing in this situation.
In any case, you will certainly need an advisor to avoid the common pitfalls of refinancing, which we are going to cover…. right now!
Common Pitfalls and How to Avoid Them
There are common pitfalls to refinancing. The first one is to not get an advisor. Let’s call it the gateway pitfall, as most other mistakes will often be incumbent on this primordial failing.
Advisors simply have a better view of the market than you, because they spend their working days solving exactly this type of problem.
Fuse capital can help in this respect: we know the x’s and y’s of refinancing, how to address them, what to say to the lenders, and what not. But why tell you, when we can show you?
Here are the most common pitfalls of refinancing, and how Fuse Capital addresses them.
Not Negotiating the Best Terms
The Pitfall
You’re refinancing, but your new terms are not significantly better than your previous ones. Why did you bother in the first place, then?
The Fuse Capital Way
We negotiate these deals constantly and know the imaginable scenarios and outcomes. It’s all about recognising patterns and adapting your position turn after turn in the negotiation process. A bit like chess.
We know when to sacrifice the rook to get to the queen because we are playing this game every day.
Not Having Objective, Independent Reviews of your Current Debt Structure
The Pitfall
You need honest reviews of your current debt structure at the onset of a refinancing process. Often, your VC representative is your consigliere for these matters. Even though he was there for you the first time and has a track record of being fair to you, he has a vested interest in your financial operations.
The Fuse Capital Way
We have no vested interest while reviewing your current debt structure. So you know it’s real advice. We look into your debt structure and take time to patiently devise a model which works.
We then present that to new lenders in a way that’s designed for success, because we know how to ride the fine line between a) what the lender likes to see and b) what will work for you financially.
This is based on a member of our deal team, probably...
Not Knowing Which Lender is Active in the Market
The Pitfall
Let’s say you already know you want to refinance, right now. You know your figures and feel prepared. You have an idea of which lenders to seek a partnership with. So you send request upon request upon request.
The piece of intel you are missing is: which fund is available right now? Funds have a lender’s journey, and might not be in the disposition to give you the deal you want.
What you have done is spend countless hours e-mailing funds you had no chance to secure a deal with in the first place. By no fault of your own per se.
The Fuse Capital Way
Or maybe it was your fault for not talking with an advisor!
At Fuse Capital, we know which lenders are available and for which deal type. We have ears everywhere and talk to funds every day. You don’t need to lose your time sending your request to dozens of lenders who are not ready for a deal yet.
Managing your incumbent / not enough competitiveness
The Pitfall
Having one lender is tricky. They think there’s no competition. They can play hardball because you have no other resources apart from them. There is a power imbalance.
Getting the best deal from your incumbent often requires showing signs that you are looking elsewhere.
Increasing the sheer number of stakeholders can make negotiations more competitive. It gives you leveraging power.
However, you don’t want to use these levers haphazardly. The goal is not to pull the rug from under your current collaborators, but to engage them with healthier negotiating patterns.
The Fuse Capital Way
We can help with that because we’ve been through these motions hundreds of times already, as opposed to maybe your first, or second time. Our team is quick on their feet, reliable and easy to talk to.
Whether it is to soften up a lender or perform an amicable teeth-showing to protect your interest, the Fuse Capital team is here for you.
We also make sure to keep the incumbent on their toes.
No Compass to Sail Through the DD Process
The Pitfall
The due diligence is famously tenuous and rigorous for a reason: it’s a pain for everyone involved. You’re not the only one not having fun. You know, you’ve been there before!
Whether or not it went well, you’ve heard how many deals fail because of it. It’s a non-negligible added load on your workstreams. Maybe you did your first DD on your own, and it went well. Good for you. It’s not a guarantee of success for the next one.
You know what is?
The Fuse Capital Way
Stack the odds in your favour. You have done this once. We have done this hundred of times. We can alleviate some of that added load on your workstreams, and streamline the process, as well as the communication with your next business partners.
A good DD energy can help your partnership start off on the right track. On top of that, you have more time to focus on your day-to-day ops, and cruise through the DD process.
When Is The Best Time For Refinancing?
Are there specific times to avoid refinancing? When is the perfect time to refinance?
The answer’s actually pretty simple: if your goals can be met, anytime is a good time. With the market slowing down its pace being in a bear state, opportunities for M&A, IPOs, acquisitions or new funding become more scarce.
That can be a good time to work on operations which improve your company’s health and financial structure. Refinancing might help you go through the bear market with as little damage as possible.
During more prosperous times, you can profit from a lower interest rate to consolidate your debt into one which has more favourable interest rates.
During the bear market, the upside of refinancing can also be tied to consolidating your debts into one that has a fixed interest rate, if it was not the case before.
You can look into refinancing if you feel things are not moving fast enough for your company and you can present new lenders a clear use of funds.
Lastly, if all hell breaks loose and your investors go down, you might definitely look into refinancing...right away.
Conclusion
This was rather big, and good job going through all of it. Rare to see such an attention span these days.
You now know what is refinancing and why you should probably look into it.
You've also learned what mistakes to avoid, and how to avoid them. The answer almost always is: call your advisor.
The best way to start is by requesting a call with one of our team members, here at Fuse Capital.
.png)
