Refinancing means replacing existing debt with new funding. Refinancing risk is the possibility that this cannot be done on time or on acceptable terms. Price is only part of it: a lender may refuse altogether. That alone need not mean non-payment if the borrower has other usable funds. A new loan does not create operating revenue; it changes the funding source and the obligations that must be repaid later.
Imagine a company that has routinely renewed its loan. When market conditions worsen, offering more interest may not be enough: a lender may shorten the term, lend less or refuse another loan. BIS distinguishes the ability to obtain funding from the ability to sell an asset without an unacceptable loss. These problems can coincide exactly when money is needed. Assets may therefore provide less usable backup than they appear to. BIS liquidity guidance addresses banks; here it explains a mechanism, not a mandatory corporate metric. Assess the quoted price separately from the amount that can actually be drawn. [1]
In our own scaled example, principal of 100 USD, or US dollars, is due. Principal means the amount borrowed, excluding interest. The company has usable cash of 20, borrows another 90 and immediately pays a fee of 2. After repaying the old debt, 20+90−2−100 = 8 remains, with new debt of 90. Net loan proceeds are 88, not the full 90. Do not read the bank balance as profit from selling goods or services: some money comes from a new obligation. For the example to work, drawing must settle on time and the contract must permit using the funds to repay the old debt. [2]
BIS analysis in 2025 examines benchmark rates and credit spreads, the extra price charged for a particular borrower's risk. Our old principal of 100 USD at an annual rate of 2% requires interest of 2. New principal of 90 at 7% requires 6.3. Annual cash interest rises by 4.3 even though the debt itself fell. This is a simple comparison of annual interest, not an effective-rate calculation incorporating timing and other costs. Fees, principal repayments and the length of the period need separate assessment. [3]
For a secured loan, a lender may value collateral more cautiously than the market does. The portion excluded when setting the loan amount is called a haircut. Our own illustration, not a loan offer: BTC collateral worth 200 USD with a haircut of 25% permits modeled borrowing of 150. If value falls to 120 and the haircut rises to 40%, only 120×(1−0.40) = 72 remains. Replacing debt of 100 leaves a gap of 28. Falling prices and stricter lender valuations can reinforce each other. The haircut is not another BTC price loss; the lender determines eligible collateral, actual limits and other terms. [1]
An indicative interest quote is not a signed contract or money credited to the account. Even a committed credit line, an arrangement to draw an agreed amount, may have conditions and its own expiry. Our backup line of 40 USD ending on 1 June does not automatically cover debt due on 1 July. Check whether funds may be drawn in advance and when that new borrowing itself must be repaid. Earlier drawing can help if the contract allows it, but the line's existence alone does not answer that question. Its extension must also be agreed, not merely expected. [1]
Extend our model debt of 100 USD and add a fee of 5 to principal, and the obligation becomes 105. Moving the date is not debt forgiveness. New security can also give a lender priority over others in that asset. Another route is to raise money from owners: issuing 25 identical shares alongside 100 existing shares reduces the original holders' combined ownership to 100/125 = 80%. This is dilution. Debt may also be converted into shares under specified terms, but conversion is not automatic; contractual rights and conditions govern it. Ask what the company gives up in exchange for time or new funds. [4] [5]
Several sources reduce dependence on one provider without necessarily being independent. Our company spreads maturities across 3 lenders, but all could restrict credit during the same market shock. In a no-new-loan test it has cash of 10 USD and receives another 10 from operations during the period. Against principal of 100 due, the gap remains 80, excluding other fees and asset sales. This is our scenario, not evidence about an actual company. A useful test combines weaker operating receipts with closed funding because both can happen together. Spreading lenders alone does not guarantee a market willing to lend. [1]
Try covering debt of 80 USD with reserves of 70 EUR. At 1.1 USD per EUR, they produce 77, leaving a gap of 3; at 0.9, they produce 63, leaving 17 before fees. Adding reserves in different currencies without converting them is not enough. Check whether transfers are possible and how long it takes before funds are usable. A currency hedge, a contract limiting the effect of exchange-rate moves, has its own terms and expiry. Extended debt and a shorter hedge may no longer align. Refinancing succeeds when the new resources actually cover the old obligation, not when an attractive rate is quoted. [1]
For the clearest picture, read this entry together with Debt maturity, Leverage, Cash flow, Capital structure. The reverse links also lead from Convertible note, Debt maturity, Credit risk, Interest rate risk.