How does the refinancing of companies work?
Refinancing is a financing instrument with which banks can finance their lending business and companies can reschedule loans or change their capital structure. Read in this article how refinancing works for banks and companies exactly and when it makes sense.
Definition of refinancing at banks
Refinancing at banks is when it comes to financing a bank’s lending business. In order to be able to lend, the bank must raise money elsewhere, because it must be able to finance the loans to be granted.
In this case, refinancing therefore means raising money from banks to finance their customer loans. The loans are not financed directly by the bank, so to speak, but from the liquid funds it procures. The cheaper it gets to these funds, the cheaper loans it can offer its customers.
The refinancing of a bank thus covers its liquidity needs and thus directly influences the economic situation of the bank. There are several sources where a bank can use to refinance its lending business: The two most common types are through savings deposits of its customers and through raising capital from the national central banks.
A bank works with the money from customer savings deposits, which are stored, for example, in overnight money accounts: it invests it and tries to achieve a return on it, which in turn is then used to refinance the lending business.
When raising capital through a central bank, a bank borrows money cheaply and uses it to lend. Currently, the bank’s key interest rate is 0%. This means that a bank does not have to repay interest on the borrowed money, which has a positive effect on the economy.
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Refinancing for real estate loans
Refinancing of real estate loans is very common. If private or institutional borrowers decide not to sell a property purchased by loan, but to use it as an investment object, it may be cheaper to refinance it.
Refinancing makes sense if real estate prices are expected to rise over a longer period of time, interest rates have fallen, or if a higher return can be achieved by renting than when selling. If the existing loan is then rescheduled or refinanced, you can secure a cheaper follow-up loan to pay off the remaining debt for the property.
Private borrowers are often also faced with the decision to refinance, namely when the fixed interest rate of their previous loan expires and the bank increases interest rates for the further term. If a cheaper refinancing loan can then be found with which you can redeem the remaining amount, higher interest rates can be avoided.
When does refinancing at the end of the term make sense for companies?
The fixed interest rate on a long-term loan should always be kept in mind. If this expires, companies have the opportunity to reschedule the loan and can thus possibly benefit from lower interest rates, or at least from constant interest rates. Banks often use the fixed interest rate process to adjust interest rates upwards.
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When repaying loans, companies must in principle take care not to endanger their liquidity. Before an interest rate fixation expires, it is advisable to obtain offers for refinancing so that you can keep various options open and possibly even renegotiate with the previous lender.
If a higher amount has been agreed for the last credit installment at the end of the term, which is to be paid as a final installment, this can also be made by refinancing. This is advisable if the closing rate would weigh a very heavy burden on the liquidity of the company, so that a liquidity bottleneck arises elsewhere.
With a solid foundation in technology, backed by a BIT degree, Lucas Noah has carved a niche for himself in the world of content creation and digital storytelling. Currently lending his expertise to Creative Outrank LLC and Oceana Express LLC, Lucas has become a... Read more