When is the right time to refinance?

geoff_steerIn the wake of the Global Financial Crisis the rules of refinancing have changed. Geoff Steer looks at how and when to approach the banks if your company is in need of more capital to improve its cash flow.

Business may see refinancing as a way to bring in more capital, improve cash flow and eventually stimulate profitability, but – like many things in business – complex questions rarely have simple answers. And timing is all important.

If your business hasn’t had to renegotiate finance for a while then the number one thing to remember is that the game has changed post-GFC.

geoff_steer
Geoff Steer

The days of getting easy finance at unbelievable rates are over and there is no sign they are coming back. Pre-GFC the banks were willing and ready to throw everything at you – that period was so competitive and money was so freely available that banks were willing to cut margins time and again. In the end the banks were caught in a race to the bottom which was unsustainable.

So now is not a great time to be refinancing in most circumstances – unless your business has a genuine relationship issue with its bank.

The “relationship” your business has with its bank should never be underestimated but is often overlooked by business when negotiating finance in the first place, as we are often drawn to the best numbers when finding a deal. Yet we know that different banks have strengths in different business sectors, which means that some banks will naturally be a better fit for your business than others.

That’s why judging finance on the numbers alone is not enough. Knowing that your business has a good working relationship with its bank, and that it can rely on strong support can be hugely important and can be worth paying a few basis points more.

For business that has little support from its financiers, and feels a change of scene is imperative, that there is no option but to refinance, then there is good news and bad news.

The good news is that the banks are under more pressure to lend after being conservative during the GFC; the bad news is that there are more hoops to jump through than before.

Banks won’t look at any business that doesn’t have all of its financial information up to date. In today’s climate your business must be prepared to jump through rigorous due diligence targets. This will be a challenge to genuinely small businesses that do not have a full time financial controller. But if you want to make yourself more bankable in this environment then just remember that your proposal will be just one of many the bank will consider – therefore it may require an extra effort to get everything together first.

Preparation will pay off and be a useful exercise in its own right. Having your latest financials, even if in draft, and year-to-date figures tracking against a budget, will give you a head start; and be prepared to be able to articulate your future strategy for the business.

Geoff Steer is a Founding Partner of Matthews Steer Chartered Accountants. Geoff’s knowledge of taxation matters combined with his financial planning skills enable him to provide a complete financial service for professional, executive and small business clients. Geoff was recently ranked one of Australia’s top 10 financial advisors by the AFR Smart Investor Magazine’s 2011 Masterclass. www.matthewssteer.com.au

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