Debt Refinancing

A Brief Overview on Debt Financing or Loan Refinancing

Debt refinancing, also known as loan refinancing, is a strategic financial solution that allows businesses to replace their existing debt with a new debt instrument offering more favorable terms and conditions.

An example of debt refinancing would be borrowing a 10-year note at a 10% interest rate to pay off a 3-year note with 20% interest. Another good example would be refinancing a 10-year note previously secured against Real Estate, which now needs to be freed from serving as collateral.

Several Benefits of Debt Refinancing

Debt Refinancing

By engaging in loan refinancing, companies can benefit in several ways. One of the key advantages of loan refinancing is the opportunity to secure a better interest rate. As time passes, interest rates on loans may decrease, enabling businesses to refinance their debt at a lower rate than their current loan. This can result in significant interest savings over time.

Furthermore, debt refinancing can help improve a company’s cash flow. By refinancing their debt with a more favorable-term loan, businesses can reduce their interest and principal payments, allowing them to retain more capital within the company and allocate it towards other operational needs or growth initiatives.

The subject debt can be refinanced with a similar loan secured with receivables or Plant and Equipment (P&E) as collateral. Debt refinancing could help improve the financial cash flow of the business and, in some cases, increase the business’s book value if the company is funnelling through a buyout or a merger phase by freeing up some assets that secure the existing loans.

Why you should opt for loan refinancing?

  • Get a better interest rate: As we discussed earlier, getting a better rate than your current loan is a win. Most of the time, the rates on the loans drop after they are borrowed, and hence, most of our clients enjoy better interest rates through loan refinancing.
  • Improve your cash flow: One of the primary purposes of debt refinancing is to add back the savings of the interest and the principal payments on the existing note when refinanced with another favourable-term debt instrument.
  • Leverage assets for special projects: Leveraging equity on the assets adds much intrinsic value. Assets such as a building, heavy machinery, or IP bear a great potential and book value which could be used for special financing projects such as launching a new product, covering the cost of an IPO, opening up a new location, or adding highly intellectual professionals to the team.
  • Increase the book value of the business: Refinancing loans fuels the business by increasing the savings/deposits and cash positions on the Balance Sheet. Companies looking for a merger, buyout, or exit - can leverage their strengths of book value to get a higher multiple on their acquisition pricing.
  • Buy more time to pay a short-term note when swapped with a long-term note: Secondary to getting a better interest rate, companies can extend the term on their notes by simply refinancing it with a longer-term note and lowering their monthly payments.
  • Save on principal payments for the initial period on the newly refinanced loan: Most refinanced loans come with the perk of InterestOnly Payments for the first 'n' Months. This again adds to the business's financial well-being by increasing the cash flow, which could then be diverted towards the growth of the business rather than paying off the lender.

Count on us for loan refinancing

At Avon River Ventures, we are business-friendly liquidity partners. Our debt refinancing process involves comprehensive diligence and a review of the Balance Sheet and Income Statement to analyze your company’s debt and its cost of borrowing. If your company has a cash flow problem, we furnish and facilitate a refinancing transaction to ensure such a problem does not recur in the future.

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