Worked Examples and Checklists
Refinancing a business loan: when switching pays, with the break-even worked out
A worked Australian example of refinancing a high-cost business loan, including early repayment fees, new lender costs, break-even months, term extension traps and tax.
Refinancing a business loan pays when the monthly saving recovers all switching costs well before the loan ends, and the new loan's conditions are no worse. The costs to count are the old lender's early repayment fee or break cost, the new lender's establishment, valuation and legal fees, and PPSR or title registrations. In the example below, moving a $120,000 balance from 18% to 9.5% recovers $4,000 of costs in about eight months and saves about $13,800 over three years. Extending the term at the same time, though, would cut the monthly repayment but give back much of that saving in extra interest.
This guide is part of the business loan application checklist. Figures are illustrative.
The situation
A café took a five-year $170,000 unsecured loan two years ago at 18% to fund a fit-out quickly. It now has a $120,000 balance with three years left, two years of strong trading, and a bank willing to offer 9.5% secured by a GSA and director guarantee.
Step 1: list every switching cost
| Cost | Amount (illustrative) |
|---|---|
| Old lender early repayment fee (2% of balance) | $2,400 |
| New lender establishment fee | $1,000 |
| Legal and documentation | $450 |
| PPSR registration and searches | $150 |
| Total switching costs | $4,000 |
If the old loan had a fixed rate, ask for a written break cost figure as well. If it requires all remaining interest to be paid on early exit, as some short-term products do, refinancing may not save anything; check the payout figure before going further.
Step 2: compare repayments over the same remaining term
Keep the term the same (three years) so the comparison is like for like:
- Current loan at 18%: about $4,338 a month
- New loan at 9.5%: about $3,844 a month
- Monthly saving: about $494
Step 3: break-even
$4,000 ÷ $494 = about 8.1 months. After roughly eight months, the café is ahead.
Step 4: lifetime saving
$494 × 36 months = about $17,800, less $4,000 of costs = about $13,800 saved over the remaining term.
Enter the same figures in the refinance calculator to check them or to try your own.
The term extension trap
The bank offers to stretch the new loan to five years "to help cash flow":
| Option | Monthly repayment | Total interest from now |
|---|---|---|
| Keep current loan, 3 years at 18% | about $4,338 | about $36,200 |
| Refinance, 3 years at 9.5% | about $3,844 | about $18,400 |
| Refinance, 5 years at 9.5% | about $2,520 | about $31,200 |
The five-year option lowers the repayment by about $1,800 a month compared with today, but costs about $12,800 more in interest than refinancing over three years. That can still be the right choice if cash flow is genuinely tight, but make it a deliberate decision. A middle path is to take the longer term and make voluntary extra repayments when cash allows, if the new loan permits extra repayments without a fee.
Step 5: check what changes besides the rate
| Condition | Old loan | New loan | Matters because |
|---|---|---|---|
| Security | Director guarantee only | GSA + director guarantee | A GSA may limit future equipment or invoice finance |
| Covenants | None | Annual financial statements, minimum DSCR | Breaching a covenant can be a default |
| Review | None | Annual review | The bank can reassess the facility |
| Early repayment | 2% fee | No fee on variable | More flexibility later |
A lower rate with tighter conditions can still be worth it, but read the covenants and reviews guide and the PPSR guide before signing.
Tax effect
Interest on business borrowing is generally deductible, so the after-tax saving is smaller than the pre-tax figure. For a company taxed at 25%, a pre-tax saving of $13,800 is roughly $10,350 after tax, although switching costs may also be deductible, sometimes spread over several years as borrowing expenses. Confirm the treatment with your tax agent.
Consolidating several debts
Businesses often refinance to consolidate a short-term loan, an equipment lease and a credit card balance into one facility. The same steps apply: list every exit cost, compare like-for-like terms, and watch for term extension. Consolidation can also free up repayment capacity and improve your borrowing capacity for future needs.
Decision checklist
- Written payout figure from the current lender, including any break cost
- All new lender costs in writing
- Break-even under 12 months is usually comfortable; over half the remaining term needs a closer look
- Same-term comparison done before considering an extension
- New security, covenants and review terms read and acceptable
- Accountant consulted on tax and structure
- Compare more than one new offer: see the three-offer comparison, and consider whether fixed or variable suits the new loan
Frequently asked questions
When should I not refinance?
When exit costs (especially full remaining interest or a large break cost) exceed the savings, when the business may be sold soon, or when the new loan requires security you are not comfortable giving.
Can my current lender match the new offer?
Sometimes. Ask, with the new offer in writing. A matched rate avoids switching costs.
Will refinancing affect my credit file?
The new lender will make a credit enquiry, and the old loan will show as repaid. A single refinance is routine; several applications in quick succession can concern lenders.
Should I refinance an ATO debt with a loan?
It can make sense if the loan is cheaper than the ATO's general interest charge and you avoid enforcement, but it turns a tax debt into secured or guaranteed debt. Get advice first.
Sources
- ATO — deductibility of interest and borrowing expenses; general interest charge
- PPSR — security registrations on refinance
- business.gov.au — managing business debt
- Australian Financial Complaints Authority — disputes about payout figures and fees
