Follow-Up Financing –
simply explained

Key facts about follow-up financing at a glance:

• Follow-up financing means the continuation of a loan at a newly agreed interest rate.

• Before each new fixed-rate period, the borrower is presented with an offer at the current interest rate.

• Repayment terms, fees, or other conditions of the loan agreement are generally not adjusted in follow-up financing.

What Is Follow-Up Financing?

At its core, follow-up financing involves the continuation of a loan at a newly agreed interest rate. The term "follow-up financing" is not entirely straightforward and is occasionally confused with a different concept in the financial sector. To clarify: follow-up financing does not refer to a new loan that follows a previously repaid loan. So what exactly does it mean?

The Interest Rate Takes Centre Stage

A loan agreement is not only about the loan amount, the term, or the repayment of the principal — it is also about the characteristics of the interest to be paid, such as whether the rate is fixed or variable. The period during which the interest rate conditions remain unchanged is called the fixed-rate period. It does not necessarily have to coincide with the overall term of the loan. If the borrower chooses a shorter period than the loan term, they will have two or more fixed-rate periods to consider, within each of which the interest conditions remain constant.

Shortly before the end of each fixed-rate period (except the last one), a new rate-fixing is due. The lender presents the borrower with a follow-up financing offer. This proposal is based on, among other factors, the current and expected interest rate level, the creditworthiness of the borrowing company, and the lender's profit expectations.

Follow-Up Financing and Refinancing

The adjustments in follow-up financing generally affect only the interest rate and not the repayment terms, fees, or other conditions of the loan agreement.

Nevertheless, additional costs often arise when interest rates increase. However, borrowers are not bound to their existing financier: as part of the follow-up financing, a loan refinancing can also be considered. Such a switch to another financing partner should, however, be planned well in advance and approached strategically — looking for a new lender two weeks before the end of the fixed-rate period rarely leads to the desired result.

Instead, borrowers who anticipate rising interest costs from their current financier can take action several months in advance. They should obtain offers from two to three potential lenders, compare them, and seek independent advice if necessary.

Additionally, a certain amount of time may need to be factored in for the reassessment and transfer of collateral and the risk assessment of the company. Nevertheless, by working with a new lender, liabilities can often be better aligned with the company's current situation. If economic conditions permit, repaying the loan with equity rather than pursuing follow-up financing can also be considered.