Can you refinance to take cash out of your business?
Yes, and the mechanism has a name: a dividend recapitalisation. The company refinances onto a larger facility, and the proceeds above the old debt are paid to shareholders as a distribution. Owners use it to take money off the table without selling the business. Two tests decide whether it works. The commercial test is whether the cash flow carries the new leverage in a soft year rather than a good one, because the debt stays after the cash has gone. The legal test is distributable reserves: borrowing fills the bank account, but only accumulated realised profits make the dividend lawful, and the Companies Act gives an unlawful one a long tail. This guide covers when lenders will fund a distribution, how a recap prices against a plain refinancing, the reserves and board mechanics, the structures used at £3m to £15m, and the cases where the honest answer is to leave the money in.
Written for the borrower’s side of the table. This is general guidance, not advice on your specific facility. It deepens the shorter answers in our working guide.
New debt on the balance sheet, and the proceeds paid to shareholders.
A dividend recapitalisation (a dividend recap, in the market’s shorthand) is a refinancing and a distribution executed as one transaction. The company raises a new facility larger than the debt it replaces, or upsizes the one it has, and the surplus is paid to shareholders as a dividend. Nothing changes in who owns the business. What changes is the balance sheet: more debt, less equity, and part of the owners’ paper value converted into cash. Private equity uses the recap routinely to return capital between exits. In the owner-managed mid-market it answers a quieter question: how to take some of the value out of a business you have spent twenty years building without selling it, floating it, or taking on a shareholder you did not choose.
The motives are usually sensible ones. An owner whose personal wealth is concentrated in one company de-risks without giving up control. A retiring or passive shareholder is bought out with the company’s own borrowing capacity rather than the continuing owners’ savings, which is a recap in substance whatever the paperwork calls it. A family balances value between members who work in the business and members who do not. The alternative route to the same liquidity is selling equity, which costs ownership permanently and brings a shareholder with views; the trade-off between the two is the subject of our guide to debt versus equity.
In practice most recaps ride on a refinancing that was coming anyway. If a facility matures inside the next two years, the marginal work of adding a distribution to the raise is small, and the timetable is the refinancing timetable. Our guide to when to start a refinancing sets out that clock; the shorter answer to the cash-out question sits in our working guide.
Lenders fund recaps for stable businesses that stay conservatively levered afterwards.
A lender reads use of proceeds before it reads anything else. Money going into the business (an acquisition, capex, working capital) buys assets or earnings the credit can lean on. Money going out to shareholders buys nothing the lender can look to, so a recap is underwritten on the business exactly as it stands and on the discipline of the people taking the cash. The credits that clear share a shape: earnings that are stable and cash-generative, with recurring or repeat revenue a committee can underwrite forward; a record of borrowing and paying down, because a business that has deleveraged once is assumed able to do it again; modest capital intensity, so the cash flow is available for debt service rather than spoken for; and owners who are taking some value out while leaving a meaningful stake in, which tells the lender the people who know the business best still believe in it.
Expect the documents to enforce the discipline the credit committee assumed. Facilities funding a distribution commonly carry restricted-payments clauses: further dividends permitted only within a basket, or only below a leverage threshold, or locked up entirely until the debt has stepped down. That is not hostility; it is the lender writing its assumption into the contract. Appetite also varies more between lenders on recaps than on almost any other purpose. Some credit committees will not fund shareholder distributions at all as a matter of policy, and a decline on those grounds says nothing about the business. Which is why the recap ask, more than a plain refinancing, rewards approaching a spread of lenders rather than relying on one relationship.
The request also lands better presented as a plan than as a withdrawal. Sizing set on a downside case rather than the forecast, covenant headroom of 25 to 30% against the base case, and a stated distribution policy for the years after all signal the discipline lenders are pricing. How the sizing arithmetic works from the borrower’s side is set out in our guide to how much your business can borrow.
The same pricing grid, applied less generously.
A recap uses the instruments of any refinancing and prices off the same grid. Bank senior debt runs at roughly 2.5 to 3.5 times EBITDA; debt funds stretch to 4 times and beyond. Mid-market debt is floating-rate over SONIA, which stood at 3.73% on 2 July 2026 against a Bank Rate of 3.75%, held at the Bank of England’s June meeting. Bank of England, Bank Rate. UK mid-market unitranche is broadly SONIA plus 550 to 800 basis points, an all-in coupon of roughly 9.25% to 11.75% before fees. Deloitte Private Debt Deal Tracker. What the purpose changes is where you land within those ranges. By market convention, leverage on a distribution deal is set inside what the same lender would extend for an acquisition of the same business, and the concessions arrive in the documents rather than the margin: tighter restricted-payments language, leverage tests before further dividends, sometimes a shorter tenor. The full stack of margins and fees, line by line, is in our guide to the all-in cost of raising debt.
The arithmetic below shows what the choice of route means in cash. These figures are illustrative arithmetic at August 2026 rates, not a quote: a business with £3m of scrubbed EBITDA and £3m of existing term debt, one turn of leverage, wanting to take money out.
The bank route
A bank refinancing at 2.75 times raises £8.25m. Repaying the £3m of existing debt leaves £5.25m, before fees, for the shareholders. Interest at an all-in near 6.75% is about £557,000 a year, roughly 19% of EBITDA, with cover around 5.4 times, which is comfortable. The bite is amortisation. Repaid straight-line over five years the loan adds £1.65m of annual principal, and total debt service of about £2.2m against £3m of EBITDA is tight once tax and capex are paid. The profile gets shaped in negotiation, part amortising and part balloon, which is normal and is exactly what the term sheet is for.
The fund route
A unitranche at 4 times raises £12m: £9m out, before fees, after repaying the existing debt. The repayment is a bullet, so there is no amortisation pressure, but interest at an all-in of about 10.25% runs £1.23m a year. That is 41% of EBITDA, every year, with cover at about 2.4 times, and a soft year lands directly on that cover.
The marginal pound
The fund route puts £3.75m more in the shareholders’ hands today and costs about £673,000 more in interest each year: roughly 18 pence per marginal pound, per year, before fees. The stretch exists and for some owners it is the right trade, but a distribution is the least forgiving use for it, because the cash is gone and the coupon is not. Whether the extra turn is ever worth its price is the standing question of our guide to unitranche versus bank senior debt.
The loan raises the cash; only distributable profits make the dividend lawful.
Under section 830 of the Companies Act 2006 a company may only make a distribution out of profits available for the purpose: its accumulated realised profits, so far as not previously distributed or capitalised, less its accumulated realised losses. Companies Act 2006, s.830. That is a balance-sheet test, not a cash test, and the distinction is the whole point for a recap. New borrowing puts cash in the bank and an equal liability on the other side; it creates no profit and adds nothing to reserves. A company can hold £5m of loan proceeds and still be unable to pay a lawful dividend of £500,000. The retained profits carry the dividend; the loan merely provides the liquidity to pay it.
The reserves must also be demonstrated, not assumed. Section 836 requires a distribution to be justified by reference to the relevant accounts: the last annual accounts or, where those would not support the payment, interim accounts drawn up to a more recent date. Companies Act 2006, s.836. For a distribution of recap size, the sensible practice is to prepare interim accounts to near the payment date whatever the annual accounts say, because the lender’s lawyers will ask for the reserves position and the board papers, and a ten-month-old balance sheet invites questions a set of interims answers.
The board mechanics are short but they are not optional. Under the model articles for private companies, the directors may decide to pay interim dividends, while a final dividend is declared by ordinary resolution of the shareholders and may not exceed the amount the directors recommend. Model Articles, art. 30. A careful board minutes the reserves position and the accounts relied on, and looks past the balance-sheet test to the forward one: whether the company can pay its debts as they fall due after the money leaves, on a forecast that includes the new debt service. Bespoke articles can vary the procedure, so the articles are checked before the timetable is set.
Getting this wrong is not a technicality. Under section 847, a member who receives a distribution made in contravention of Part 23, knowing or having reasonable grounds to believe that it was, is liable to repay it to the company. Companies Act 2006, s.847. In an owner-managed company the shareholders receiving the recap dividend are usually the directors who approved it, so the knowledge condition offers little shelter. The reserves work is done before the money moves, not repaired afterwards.
Where the reserves fall short of the intended distribution, there is a lawful route to creating them. A private company may reduce its share capital by special resolution supported by a solvency statement from the directors, Companies Act 2006, s.641, and the reserve arising from the reduction is treated as a realised profit for Part 23 purposes. SI 2008/1915, art. 3. This is standard corporate housekeeping, done with lawyers, and it belongs in the transaction timetable from the start rather than surfacing as a surprise in week six.
The instruments of any refinancing, arranged around the distribution.
The simplest route is an amend-and-extend with the incumbent lender: the existing facility is upsized, the maturity pushed out, and a distribution consent written into the amendment. It is the cheapest process and the quickest, and its weakness is the absence of tension; one lender pricing against nobody rarely sharpens its pencil. The stronger version is a new senior facility raised in a competitive process, sized to repay the old debt and fund the distribution together. Because appetite for recaps varies so much between credit committees, the spread of terms that comes back is usually wider than on a plain refinancing, which is precisely when a process earns its keep. Both clearing banks and challenger and specialist banks will fund distributions for the right credit at conservative leverage.
Where the quantum wanted sits above bank appetite, the debt fund market will look at recaps for strong credits, at the leverage and pricing set out above. That route is the expensive end of the trade-off and should be priced with eyes open: the case for paying a fund’s coupon rests on wanting more out than a bank will support, and the honest comparison is the marginal arithmetic in the worked example, not the headline quantum. For an asset-heavy business there is a third lens. Asset-based lending sizes from the borrowing base rather than the earnings, with receivables advanced at typically 80 to 90% of the eligible book, so a distributor or manufacturer with a large debtor book can fund a distribution from the balance sheet at bank-adjacent pricing; ABL houses see this use regularly.
One piece of housekeeping sits alongside all of this. Where the cash out is repayment of a documented shareholder loan rather than a dividend, it is commonly treated as debt service rather than a distribution, which changes the analysis above; the state of old director and shareholder loan accounts is exactly the kind of thing lender diligence reads closely, so tidy the paperwork early and take advice on your specific position.
A recap spends resilience, and some businesses should keep theirs.
Every pound of recap leverage buys nothing on the other side of the balance sheet, so the business after the deal is the business before it, minus headroom. That is a fine trade for a stable company levered conservatively. It is a poor one for a cyclical business near the top of its cycle, where the EBITDA being multiplied is the best it will print for a while and the debt will still be there in the trough. It is a poor one where one customer dominates revenue, because the leverage converts a commercial risk into a solvency risk. And it is a poor one where the plan ahead is hungry (a capex programme, a working-capital build, an acquisition pipeline), because capacity spent on a distribution is capacity unavailable for the plan, and a lender’s ceiling does not move simply because you have reached it.
The failure pattern is the same one that runs through every leverage decision. A recap sized to the maximum a lender will offer, in a good year, against covenants set tight to the forecast, is a structure that works only if the forecast does. The discipline that prevents it is unglamorous: size on a downside case, keep 25 to 30% of headroom against every covenant, and treat the maximum as a ceiling rather than a target. A soft year against that structure is a conversation; against the maximal one it is a covenant breach in which the distribution is the first thing the lender mentions.
If the arithmetic does not support the recap you wanted, the alternatives are not failures. A distribution policy paid out of free cash flow delivers less per year and costs no headroom. A minority equity raise prices the liquidity in ownership instead of coupon and carries no covenant. A partial or full sale answers the concentration problem completely. And patience has arithmetic of its own: a year of retained profits builds the reserves the dividend needs and shrinks the leverage the same distribution would require.
We will price the recap on your numbers before a lender does.
If you are weighing a distribution, the useful first step is a straight read of your own position: what the cash flow carries in a soft year, where the reserves stand, which lender categories have appetite for the ask, and what the marginal pound of cash out costs on each route. That is a confidential conversation and it costs nothing, including when our answer is that the business should keep its headroom. See how a mandate runs in how we work, or the full range of what we advise on in our services.