Refinancing a Business Loan or Switching Banks

Businesses move their lending for four good reasons. Price: another bank will lend the same money for less. Appetite: your bank's limit for your industry is full, or it is shrinking the kind of lending you need. Structure: you need a shape of facility your bank will not offer — a longer term, a facility that grows with your debtors, a different currency. And service: the people who knew your business have gone, and nobody who replaced them has read your file.

There is a fifth reason, and it does not travel: the bank said no because of what is in the file. A new lender reads the same accounts, and credit desks read them in much the same order. Moving banks fixes a problem with the bank. It does not fix a problem with the request, and the guide to a declined application explains how to tell which one you have before you spend months finding out.

Your current bank has watched you for years: forecasts set against what arrived, accounts that came on time or did not, how you behaved in the bad quarter. A new bank has none of that. It reads the same documents, but with nothing to set them against, so it leans harder on them — and on one question it will ask early, and mean: why are you leaving?

It asks because the borrowers most eager to move include the ones their current bank would be glad to see go. A good answer is specific and checkable — the price, the appetite, the structure, with the paperwork to show it. Expect to be asked for your current facility agreements and your recent covenant compliance, and expect a first offer to be priced for a customer the bank does not know yet. The developer in Issue 08's developer's chair meets exactly that: a new bank that wants his next six projects, and will not fund the first one as asked.

The saving from a lower margin arrives slowly, over the years the loan runs. The costs of moving arrive at once:

• Break costs on any fixed-rate money repaid before its fixed term ends. When the rate was fixed, the bank arranged its own funding or hedging for the term; if wholesale rates have fallen since, unwinding it costs money and the agreement passes that cost to you.
• Fees at the new bank — an establishment fee, often a percentage of the facility.
• Legal fees and valuations, usually for both banks' lawyers, and a new valuation of any property.
• Releasing and re-registering security — mortgages discharged and registered again, registrations over business assets released and replaced.
• Time, most of it yours, and the risk of a gap if the old facilities end before the new ones can be drawn.

An illustration, in round numbers and not a case: a business has a US$6.0m term loan, fixed, with three years to run, repaying US$1.0m a year. Another bank offers the same loan at a margin 0.40 points lower. Wholesale rates for the remaining term have fallen 0.60 points since the loan was fixed.

Moving now costs more than it saves: the new margin would have to be about 0.93 points lower just to break even. The same move at the end of the fixed term carries no break cost — US$50k of costs against the same US$60k of saving — and the only thing the business gives up by waiting is the difference for the time it waits. The rough break-cost figure here is how the charge is usually explained; your loan agreement sets the actual method, and the bank will quote it on request. Ask for the figure before anything else.

Tell your bank when you have a credit-approved offer, not before. Many banks will want to respond, and a response on terms you can compare line by line may be worth more than the move. Give it the whole offer, not the headline rate: a margin quoted without its fees, its covenants and its security is a number your bank cannot match honestly, because it does not know what it is matching.

Expect the answer to split. Your bank may match a price, because a price is a market fact, and decline to match a structure it thinks is wrong for your business — and it may be right, since it is the lender that has watched your stock, your debtors and your bad quarters. What a borrower should not do is bluff. Saying you will move when you will not is heard once, and remembered at the next review.

1. Name the reason you are moving, and check it is one that travels.
2. Read your current agreements: notice periods, prepayment terms, break costs, and the security that will need releasing. Ask for the break-cost figure.
3. Give the new bank a complete application — the guide to preparing one applies in full, because it has no history of its own to fill the gaps.
4. Get a credit-approved offer with its conditions, not an indicative term sheet.
5. Then tell your current bank, in writing, and hear its answer.
6. Sign the new facilities and satisfy their conditions before the old ones are repaid — valuations, security, legal sign-off.
7. Move everything that runs through the old bank: payments and direct debits, card terminals, and any bank guarantee held by a landlord or a customer, which has to be replaced before it can be released.

When the file is the problem, because it moves with you. When the costs of leaving are larger than what leaving saves, which on fixed-rate money is often true until the fixed term ends. In the middle of a seasonal business's peak, when the facility is fully drawn and a gap would be expensive. And when your bank is working through a difficult period with you: to a new lender a move made then reads as an escape, and you give up the one bank that knows the history behind the numbers.

Sometimes the move is not your idea. A bank can decide to stop lending to a business and ask it to find another lender, and how it does that — with time, with reasons, or without either — says a good deal about the bank. Some banking codes set a floor under it: Australia's requires a bank to give a small business that is not in default at least three months' notice of a decision not to extend its loan.