Common Refinancing Mistakes and How to Avoid Them
- Feb 17
- 7 min read
Refinancing mistakes can transform potential savings into expensive setbacks. With 36+ years guiding UK businesses through debt restructuring, First Enterprise has identified the critical errors that erase refinancing benefits and the straightforward strategies that prevent them.
Why seven mistakes? Many guides cover only a handful of pitfalls, but in practice we see seven recurring mistakes that most often undermine refinancing outcomes, especially when decisions are rushed or based on headline numbers.
In This Guide
Mistake 1: Focusing Only on Monthly Payments, Ignoring Total Costs
The most common and expensive refinancing error is prioritising lower monthly payments without calculating total costs over the full loan term. This typically happens when businesses face cash flow pressure and focus on immediate payment relief without fully considering the long-term implications.
Extending loan terms can reduce monthly obligations, but it often increases total interest paid, even when the headline rate improves. This is particularly common when businesses refinance away from short-term or higher-cost borrowing.
For example, a £50,000 loan at 28% APR with 36 months remaining requires monthly payments of approximately £2,040. Refinancing that balance over 60 months at a lower but still structured rate of 16% APR reduces monthly payments to around £1,220 - a tempting saving of more than £800 per month.
However, total interest on the original loan over the remaining 36 months would be approximately £23,400. The refinanced loan would cost around £23,200 in interest over 60 months. While the monthly pressure is significantly reduced, the overall cost remains broadly similar - and the business is committed for a longer period.
This doesn’t mean refinancing is wrong. It means the decision should be made with full visibility: understanding whether the goal is short-term cash-flow relief, long-term cost reduction, or overall financial stability.
How to Calculate True Costs Properly
Always calculate total interest over the full term for both existing and proposed loans. Multiply monthly payment by remaining months, then subtract the outstanding principal. This shows exactly what you'll pay in interest.
Compare total costs, not just monthly payments. If extending terms saves monthly cash flow you genuinely need, acknowledge you’re prioritising liquidity over minimising total costs - this might still be the right decision, but make it consciously.
Consider hybrid approaches. Could you refinance to a moderate term that reduces payments somewhat whilst limiting total cost increases? A 48‑month refinancing might provide needed cash flow relief whilst controlling total interest better than extending to 60 or 72 months.
Mistake 2: Ignoring All Refinancing Costs and Fees
Refinancing involves multiple costs beyond interest rates: arrangement fees, early repayment charges on existing loans, legal fees for security documentation, valuation fees for asset-based lending, and potential broker fees. Overlooking these expenses dramatically reduces or eliminates apparent savings.
Typical refinancing costs for a £75,000 loan include arrangement fees of 1–3% (£750–£2,250), early repayment penalties of 1–2 months' interest (£750–£1,500), legal fees (£300–£800), and valuation costs if using assets as security (£200–£1,000). Total transaction costs can easily reach £2,000–£5,000.
If refinancing saves £100 monthly in interest, you need 20–50 months just to break even on costs before experiencing actual savings. Many businesses refinance without this calculation, discovering minimal benefits, or even losses, after factoring in all expenses.
Comprehensive Cost Analysis Framework
Request early settlement figures from existing lenders showing exact payoff amounts including all penalties. Don’t estimate - precise figures prevent surprises during the refinancing process.
Obtain detailed quotations from new lenders itemising every fee: arrangement fees, booking fees, valuation costs, legal fees, broker fees, and any other charges. Insist on written confirmation of total costs before proceeding.
Calculate your break-even point by dividing total refinancing costs by monthly savings. If costs total £3,000 and monthly savings equal £120, you break even after 25 months. If you plan to maintain the loan beyond this point, refinancing can make financial sense.
Factor in opportunity costs of funds used for refinancing fees. Could that £3,000 generate better returns invested elsewhere in your business? Sometimes paying slightly higher interest whilst deploying capital for growth can deliver better overall results than refinancing.
Mistake 3: Applying at the Wrong Time
Refinancing timing significantly affects outcomes. Applying during weak trading periods, immediately after adverse events, or without adequate preparation typically results in declined applications or poor terms that don’t justify switching.
Lenders assess current business performance heavily. Applying during seasonal low periods, immediately after losing major contracts, or during business transitions presents your company in the worst possible light, even if underlying health is strong.
Optimal Refinancing Timing Strategy
Apply after strong quarters when bank statements show healthy balances and consistent revenue. Ensure your most recent trading period demonstrates stability.
Avoid seasonal troughs if your business experiences predictable variations. Retailers often look weaker after peak season; construction may dip in winter.
Wait for milestone completion rather than applying mid-project. If you're implementing major changes, allow time to show results before refinancing.
Plan around rate cycles when possible. If rates are moving, decide whether to lock in improvements now or wait — but only if your current position is sustainable.
Mistake 4: Not Shopping Around Properly
Many businesses apply only to their current lender or accept the first offer received, missing better terms available elsewhere in the market. Lender pricing varies significantly based on risk appetite, funding costs, and strategic priorities.
High street banks, challenger banks, specialist lenders, and Community Development Finance Institutions (CDFIs) each serve different market segments with distinct pricing. What one lender considers too risky, another might actively support at competitive rates.
Comprehensive Market Research Approach
When exploring refinancing, speak to a small number of lenders operating in genuinely different parts of the market. This may include your current lender, a specialist lender, and a community or relationship-based lender such as a CDFI. The aim is not to create a bidding war, but to understand how different lending models structure affordability, risk, and repayment.
Request clear, written terms rather than indicative ranges. Phrases like “rates from 18% subject to assessment” offer limited insight. A usable offer sets out the full structure - for example: “17.5% APR fixed, 2% arrangement fee, monthly repayments, early repayment permitted after 12 months without penalty.”
Compare offers on a like-for-like basis, focusing on total cost, repayment structure, and flexibility, not just the headline rate. A 20% APR facility with no arrangement fee, predictable monthly repayments, and flexible early repayment may be more suitable, and sometimes cheaper in practice, than a 17% APR option carrying high upfront fees, restrictive penalties, or short-term repayment pressure.
The right refinancing decision balances affordability today with sustainability over the full term. Understanding how each lender structures risk and repayment is more important than pursuing the lowest advertised rate.
What to Compare Beyond Interest Rates
Mistake 5: Refinancing Without Fixing Underlying Issues
Consolidating expensive debt provides temporary relief, but without addressing root causes of cash flow problems or weak financial management, many businesses simply accumulate new debt whilst servicing consolidation loans - creating worse positions than before refinancing.
This pattern occurs frequently: businesses consolidate multiple credit cards and overdrafts into one loan, experience immediate payment relief, then gradually rebuild credit card balances and overdraft usage. Within 12–18 months, they're servicing both the consolidation loan and new accumulated debt.
Sustainable Refinancing Requires Behaviour Changes
Implement cash flow forecasting alongside refinancing. Establish 13‑week rolling forecasts to reduce the chance of emergency borrowing.
Close or significantly reduce cleared facilities after consolidation. Otherwise, available credit can become tempting when challenges arise.
Build cash reserves systematically using savings from refinancing. If consolidation frees £400 monthly, consider committing a portion to building a buffer.
Address pricing or margin issues if refinancing stems from insufficient revenue to cover costs. Operational changes must accompany financial restructuring.
Mistake 6: Damaging Credit Scores Through Multiple Applications
Applying to multiple lenders simultaneously triggers numerous hard credit searches that can temporarily reduce credit scores. Lenders may interpret multiple recent applications as financial stress, potentially declining applications or offering worse terms than you'd otherwise receive.
Strategic Application Approach
Use soft searches first where available. Some lenders and brokers offer quotation tools that don’t affect credit scores, showing likely approval and terms before formal applications.
Stagger applications strategically if soft searches aren't available. Apply to your first-choice lender, wait for their decision, then approach alternatives if declined rather than applying everywhere at once.
Work with brokers carefully. Some brokers submit applications to multiple lenders at once. Choose advisers who research your best fit first, then submit targeted applications.
Allow recovery time between major credit events. If you recently applied for other financing, waiting a short period can help your profile stabilise.
Mistake 7: Accepting Unfavourable Terms Through Pressure
Refinancing pressure often comes from approaching loan maturity deadlines, cash flow crises, or aggressive sales tactics. Rushing into refinancing under pressure frequently results in accepting terms you'd reject with adequate time for consideration.
This mistake often follows poor timing decisions (see Mistake 3), where urgency replaces planning and reduces your negotiating power.
Protection Against Pressure Decisions
Start early when refinancing opportunities arise. Begin researching 3–6 months before current facilities mature, giving time for comparison without deadline pressure.
Never decide during first meetings. Even urgent situations benefit from overnight consideration. “I need to review with my accountant” creates necessary decision space.
Get everything in writing before committing. Verbal promises about rates, fees, or flexibility can differ from written terms.
Consult independent advisors for significant refinancing decisions. Accountants or advisors without financial incentives can spot issues you might miss under pressure.
Protecting Your Refinancing Success
Avoiding refinancing mistakes requires a systematic approach and patience, but the financial benefits justify careful execution. Businesses that evaluate options thoroughly, calculate true costs, time applications strategically, and resist pressure consistently achieve better outcomes than those who rush decisions.
At First Enterprise, we work with businesses to ensure refinancing genuinely improves financial positions rather than creating new problems. Sometimes the best advice is waiting for better timing or building credit strength before refinancing. We prioritise long-term financial health over short-term fixes.
