Quick Summary
Refinancing is not just for lowering interest rates; it’s a strategic tool to improve cash flow, access equity, and align debt with your current business goals.
Key triggers to re-evaluate your loans include: your credit score has improved, the asset’s value has increased, market interest rates have dropped, or your business needs have changed.
The process involves assessing your current loan, gathering financials, comparing new lender options, and calculating the break-even point to ensure the benefits outweigh the costs.
Refinancing can unlock trapped equity in your assets, providing working capital to fund growth, purchase new equipment, or expand operations without taking on entirely new debt.
Many business owners sign an asset loan for a new truck, piece of machinery, or commercial property and then adopt a “set and forget” mentality. The monthly repayment becomes a fixed line item in the budget, and the loan itself is not thought about again until the final payment is due. This passive approach, while simple, can be incredibly costly. It can leave a business trapped in an uncompetitive loan with inflexible terms while its own circumstances—and the wider economic market—have changed dramatically.
Smart business operators, however, treat their debt not as a static burden, but as a dynamic financial tool that requires regular review and optimisation. Refinancing an asset loan is one of the most powerful strategic moves a business owner can make to improve their financial position. It is about more than just chasing a slightly lower interest rate; it is about fundamentally restructuring liabilities to better serve the business’s goals today. This guide covers the key strategic triggers that signal it is time to re-evaluate existing loans and outlines the simple process to follow.
Strategic Triggers: When to Consider Refinancing
Trigger 1: Your Financial Position Has Improved
One of the most compelling reasons to review existing finance is a significant improvement in the business’s financial standing. If the business’s credit score has improved since the original loan was taken out, it is now viewed as a lower-risk borrower and will likely qualify for a much more competitive interest rate. Similarly, if the business can demonstrate a longer, more stable trading history with healthy and consistent cash flow, it gains significant negotiating power and access to a wider range of lenders who may have previously been out of reach.
Trigger 2: Market Conditions Have Changed
The most widely understood trigger for refinancing is a change in the broader economic environment. If the Reserve Bank of Australia has lowered the official cash rate since the original loan was established, it is highly probable that new loans are being offered at lower interest rates. A business with a fixed-rate loan taken out in a higher-rate environment could be overpaying by a significant margin. Re-evaluating the loan in a lower-rate market can lead to substantial savings in interest payments.
Trigger 3: The Asset's Value or Your Equity Has Changed
The value of business assets is not static. If an asset, particularly commercial property, has appreciated in value since it was purchased, the business’s equity position has improved. This lowers the Loan-to-Value Ratio (LVR), making the business a much more attractive proposition for lenders. This increased equity is a valuable resource that can be accessed via a “cash-out” refinance. This process allows the business to borrow against the increased value of the asset, providing a lump sum of working capital that can be used for strategic purposes like expansion or investment.
Trigger 4: Your Business Needs Have Evolved
A loan that was suitable for a business two or three years ago may no longer align with its current strategic needs. Refinancing allows for a complete restructuring of debt to better fit the business’s present circumstances.
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Debt Consolidation:
A growing business may be juggling multiple asset loans, credit cards, and lines of credit. Refinancing can consolidate these disparate debts into a single, streamlined loan, simplifying financial management and often resulting in a lower overall interest rate. -
Improved Loan Features:
An older loan might be a basic, no-frills product. Refinancing can provide access to more flexible and powerful features, such as an offset account to reduce interest payable, a redraw facility to access extra repayments, or the ability to make penalty-free additional payments to clear the debt faster. -
Cash Flow Improvement:
If a business needs to reduce its monthly outgoings to improve cash flow, refinancing to a longer loan term can lower the regular repayment amount. While this may increase the total interest paid over the life of the loan, the immediate benefit to working capital can be a crucial strategic advantage.
Viewing refinancing as merely a way to get a lower rate is a tactical, reactive mindset. A more sophisticated approach is to see it as a response to a range of interconnected triggers, both internal to the business (like an improved credit score) and external (like changing market rates). This positions refinancing as a form of active balance sheet management. A business’s assets and liabilities should not be static elements on a spreadsheet; they are dynamic tools that need to be re-optimised as their value and cost change over time. Savvy business owners should schedule an annual review of their entire debt portfolio, just as they would review their profit and loss statement. It is a strategic management task, not just a reaction to a problem.
The Refinancing Process for Commercial Assets: A Step-by-Step Guide
Step 1: Assess Your Current Loan
The first step is to gain a complete understanding of the existing financial commitment. This involves gathering the current loan statements and identifying the key details: the precise outstanding balance (known as the “payout figure”), the current interest rate, the regular repayment amount, and the remaining term of the loan. Critically, it is essential to check the loan contract for any “early exit fees” or “prepayment penalties,” as these costs must be factored into the decision-making process.
Step 2: Review Your Financial Position & Gather Documents
With a clear picture of the existing loan, the next step is to prepare for the new application. This involves checking current personal and business credit scores to understand the business’s current creditworthiness. Concurrently, the necessary documentation should be compiled. This typically includes one to two years of financial statements, recent tax returns and BAS, business bank statements, and specific details of the asset being refinanced (e.g., make, model, and VIN for a vehicle, or the full address for a property).
Step 3: Compare Lenders and Loan Options
This is arguably the most crucial stage of the process and where a finance broker provides immense value. Instead of approaching just one or two lenders, a broker can compare dozens of loan options from a wide panel of banks and non-bank lenders. They will assess not just the headline interest rate but also the associated fees, the flexibility of the loan terms, and the features offered to find the optimal solution for the business’s specific needs. The outcome of this step should be one or more detailed loan offers or quotes for accurate comparison.
Submit the Application and Settle
Once the best refinancing option has been identified, a formal application is submitted to the new lender. The lender will conduct their credit assessment and, upon approval, will issue formal loan documents. Once these are signed and returned, the new lender will arrange to pay out the old lender directly, closing the original loan account. The business then begins making repayments on its new, more favourable loan.
Unlocking Your Equity: Refinancing for Growth
What is Business Asset Equity?
In simple terms, equity is the portion of an asset that the business truly owns. It is calculated as the difference between the current market value of the asset and the outstanding loan balance secured against it. For example, if a commercial property is valued at $1 million and the mortgage balance is $600,000, the business has $400,000 in equity.
How "Cash-Out" Refinancing Works
“Cash-out” or “equity release” refinancing is a powerful strategy for unlocking the capital tied up in an asset. The process involves taking out a new, larger loan that is sufficient to pay off the old loan, with the remaining funds paid directly to the business as a cash lump sum.
For example, consider a business with a commercial property worth $1 million and an outstanding loan of $500,000, giving it $500,000 in equity. A lender might be willing to refinance up to a 75% Loan-to-Value Ratio (LVR), which would be a new loan of $750,000. This new loan would pay off the old $500,000 loan, and the business would receive the remaining $250,000 in cash.
Strategic Uses for Released Equity
The capital unlocked through an equity release can be a game-changer for a business. Instead of seeking new, separate funding, this cash can be deployed for a variety of strategic purposes, including:
- Funding business expansion or opening a new location.
- Purchasing new, more efficient equipment or machinery.
- Renovating a commercial property to increase its value and rental yield.
- Consolidating other high-interest business debts, such as credit cards or unsecured loans.
Leverage Your Strengths: Offer Security
Providing collateral is the single most effective way to lower a lender’s perceived risk and significantly improve the chances of approval for a bad credit business loan. When a loan is secured, the lender has an asset they can sell to recoup their funds in a worst-case scenario. This security makes the application much stronger. Assets that can be used as collateral include commercial property, residential property (owned by the director), or unencumbered business assets like trucks, trailers, and heavy machinery.
Frequently Asked Questions
How soon can I refinance my asset loan?
While it can technically be done at any time, most lenders prefer to see at least 6-12 months of consistent, on-time repayments on the existing loan before they will consider a refinance application.
Will refinancing my truck loan affect my credit score?
Yes. The application for the new loan will be recorded as a hard inquiry on your credit report, which can cause a small and temporary dip in your credit score.
How much equity do I need to refinance?
For commercial property, you will generally need at least 20% equity (an 80% Loan-to-Value Ratio) to avoid Lenders Mortgage Insurance. For vehicles and equipment, lenders prefer to see positive equity, where the asset’s current market value is higher than the outstanding loan amount.
What is a "payout figure"?
This is the total amount required to fully pay off and close your existing loan account. It includes the remaining principal balance, any interest accrued up to the settlement date, and any early exit or administrative fees charged by the lender.
Can I refinance to a longer loan term to reduce my payments?
Yes, this is a common strategy used to improve monthly cash flow. However, it is important to be aware that a longer loan term usually means you will pay more in total interest over the life of the loan.
What's the difference between refinancing and getting a second mortgage?
Refinancing involves replacing your existing loan with a completely new one. A second mortgage (or caveat loan) is a separate, additional loan that is secured by the same property but sits behind your primary mortgage, often at a higher interest rate.
Are the costs of refinancing tax-deductible?
For a loan used for business purposes, the costs associated with refinancing (such as establishment fees) are generally tax-deductible. It is always best to confirm the specific tax implications with a qualified accountant.
Is it better to refinance with my current lender or a new one?
You should always compare both options. Your current lender may offer you a competitive rate to retain your business, but a new lender may be more aggressive with their pricing to win it. A broker can manage this comparison process for you to ensure the best outcome.
What is a "balloon payment" and can I refinance it?
A balloon (or residual) payment is a large, lump-sum payment due at the end of a loan term. It is very common and strategically wise to refinance this amount into a new loan facility rather than paying it out of business cash flow.
Can I refinance an asset that is old?
This can be more challenging. Most lenders have age limits on assets they will finance, particularly for vehicles. If a truck or piece of equipment is too old, a lender may only offer a more expensive unsecured loan instead.
What is a "break-even point" in refinancing?
This is the point in time where the cumulative monthly savings from your new, lower repayment equal the total one-off costs you incurred to set up the new loan. Every month after the break-even point represents a net financial gain.
Unlocking Your Equity: Refinancing for Growth
Ignoring the Total Cost
It is a common mistake to focus solely on achieving a lower monthly repayment. If this is accomplished by significantly extending the loan term, the business could end up paying substantially more in total interest over the full life of the loan. It is essential to use a cost-benefit analysis to compare the total cost of the new loan against the old one.
Forgetting About Fees
A refinancing offer that looks attractive on the surface can be undermined by hidden costs. It is crucial to account for all potential fees, including exit penalties from the old lender, and application, establishment, and valuation fees for the new loan. A “no-cost refinance” offer typically means these fees have been capitalised—or added to the new loan balance—which means the business will be paying interest on them for years to come.
Not Shopping Around
Accepting the first offer received, even if it is from an existing lender, is a significant pitfall. The lending market is highly competitive, and failing to shop around means leaving money on the table. Creating a competitive environment by comparing multiple offers is the key to securing the best possible deal.
Impacting Your Credit Score
Each formal application for refinancing results in a hard inquiry on a business’s credit file. Submitting multiple applications to different lenders directly in a short space of time can lower a credit score, making it harder to secure the best terms. This is another key area where using a finance broker provides a distinct advantage, as they can approach and negotiate with multiple lenders on the back of a single, well-prepared application.
If you think it might be time to re-evaluate your current asset loans, contact Varlo Finance for a complimentary review and cost-benefit analysis.
Re-evaluating existing asset loans should be a regular, strategic component of a business’s financial management, not an emergency measure. Waiting for a crisis or a looming balloon payment is a reactive stance that costs both money and opportunity. By proactively monitoring for key strategic triggers—such as an improved credit profile, favourable changes in the market, or the need to unlock capital for growth—business owners can ensure their debt structure is always working for them, not against them.
The process of refinancing is straightforward when broken down into manageable steps. The key is to assess the current position accurately, conduct a thorough cost-benefit analysis, and not be afraid to create competition for the business’s custom. A well-timed and well-structured refinance can be one of the smartest financial moves a business makes, freeing up vital cash flow and unlocking the capital needed to take a WA business to the next level.