BDC Perspective: A new light on refinancing

If you ever thought refinancing was simply for companies in financial difficulties, Thierry Limoges, Vice President and Area Manager, would like to set the record straight.

"Refinancing can be used to consolidate debt but that's just one side of the coin. You might also need additional cash to deal with sales fluctuations, market a new product or finance a new project. These scenarios are very positive ones for any entrepreneur," he emphasizes.

Ultimately, refinancing means reorganizing your finances to obtain the best possible payment terms and conditions. "Many entrepreneurs tend to get the lowest interest rates possible for a short repayment period and realize suddenly that their payments are too high. Refinancing can help you get more advantageous amortization periods that enable you to make your payments and still continue investing in your company," he says.

In general, he recommends that entrepreneurs look for the longest payment terms possible and ensure that repayments are permitted without penalty. "In today's complex business environment, we deal with unforeseen factors such as escalating currencies, foreign competition and rising oil prices. Getting longer payment terms lowers your monthly payments and enables your company to ride through these tougher periods," he believes.

How can your company leverage its assets?
Refinancing can be used to meet your company's specific objectives, whether it's dealing with seasonal sales or financing your business transition. BDC offers refinancing options as well as consulting services that can help you assess your financial situation, do effective planning and better manage change.

Thierry gives a few concrete examples of how entrepreneurs can refinance assets such as building or equipment to meet their business goals.

Fluctuating sales
In Scenario A, a profitable company with a series of new products requires ongoing research and development. However, the second phase of R&D is delayed, so one of the products is launched later than anticipated. Although the company is generally profitable, the owner is faced with dramatically decreased sales for a specific period of time. As a solution, the entrepreneur refinances equipment to generate additional working capital. In turn, this working capital is used to help market the new product and drive sales.

New client demand
In Scenario B, a fast-growing company suddenly gets several new clients but doesn't have product inventory to meet demand. The lender has confidence that the business owner can repay the debt because the company has a history of strong sales. In this case, the firm refinances its assets to generate cash in order to buy the necessary inventory.

Buyouts
In Scenario C, 1 of 3 shareholders in a company decides to leave during a period of strong growth. Rather than abandon this profitable company, the remaining 2 shareholders refinance their building and use the cash to buyout the other shareholder.

Business transition financing
Scenario D involves an entrepreneur who is selling a business to an external party. To ensure continuity of the business,  the owner has to partly finance the transaction. To generate the transition financing, the entrepreneur refinances the building.

Getting ready to see your bank
First and foremost, your financial institution will want to be sure that your company doesn't present too much risk and that your refinancing project is credible. "Make sure that you go in with a clear plan of what you want to do with the money. If you are experiencing temporary difficulties in your company, then you may also be asked to demonstrate how you will rectify your situation in the future," he says.

Keep in mind that your lender will want to appraise your assets to determine their value. "For example, if your equipment is older, then your financial institution will need to ensure that the value hasn't depreciated too much," he explains. There are also other factors that a bank will take into consideration when assessing your ability to repay the debt, such as your general financial track record and the caliber of your management team. "A good credit history and a credible financial forecast will play in your favour," he concludes.