What does refinancing mean?

For companies, refinancing means replacing expiring loans and replacing them with new liabilities during an ongoing depreciation cycle. Refinancing involves risks for companies, but can also lead to cost reductions or changes in the capital structure.

Refinancing – example

A company acquires fixed assets worth EUR 100 million. These are financed with a bank loan. The customary useful life of the purchased items is ten years. The bank loan is designed as a repayment loan and has a five-year fixed interest rate. After five years, the remaining debt is 50%.

At the end of the five years, the company could continue to service the loan. However, the bank can set a new interest rate. If this is very high, the company can use another source of financing and thus replace the remaining balance at the bank.

When is refinancing suitable?

Changes to the capital structure can also be carried out as part of refinancing. If an asset was financed with a bank loan, it is 100 percent debt. Companies can improve their balance sheet situation by using a subordinated loan when refinancing. Higher interest rates may apply for this. However, from the point of view of other creditors, a subordinated loan acts like equity. Other required loans can therefore possibly be taken out on more favorable terms.