It’s a fact that businesses are in business to make money. It’s also a fact that it takes money to make money, which is why all kinds of companies find themselves in need of funds at some stage (or stages) of their lifetimes.
One way for them to access such funds is through loans. A business loan can improve the company’s cash flows and financial stability. It can also increase its working capital, which can then be used for many business activities. A loan is also useful when the company is looking to expand its operational footprint, finance a capital expenditure, or acquire another company.
That said, there can be times when companies want to reduce their loan repayment burden by reducing the monthly EMI outflow or revising the interest rate, repayment schedule, or other terms. In such situations, business loan refinancing can be a good option.
Why You Should Consider Refinancing an Existing Business Loan
Your business can benefit from loan refinancing in many ways. For one, it can help you pay off your outstanding debt in a less burdensome fashion. It can also provide many other benefits, such as:
Lower interest rates
You can get a new loan at a lower interest rate, which will help you save a considerable amount of money between the EMIs of the previous loan and the EMIs of the newer, more affordable loan.
Increased capital and healthier cash flows
Since your monthly repayment burden will be significantly lower, you will be able to increase your capital corpus. You can then use this money for a wide range of business activities, such as inventory purchases, business expansion, or capital expenditures.
More predictable outflows
As your business goes through peaks and troughs, your revenues may increase or decrease. During periods when revenues are low, you may want to get better control over your cash outflows and make them more predictable. One way to do this is to convert variable interest rate loans to fixed interest rate loans – which you can do with loan refinancing.
Flexible, business-friendly repayment terms
The lender may offer more flexible repayment terms that better suit your current business and cash flow situation. For example, they may allow you to make smaller (read: more affordable) payments for a longer period of time, which will again reduce your monthly outflows. Or if you prefer to increase your repayments to pay off the loan faster and get the liability off your balance sheet, you can do that as well.
Debt consolidation for easier loan management
Debt consolidation is another advantage of refinancing. Consolidation means that you can combine multiple debts into one single loan. By doing this, you will have to repay only one loan instead of several. The result: you can avoid the hassle of repaying many loans and coordinating with multiple lenders. In addition, you may get a better deal overall by working with one lender to consolidate your debt.
Higher credit score
One of the most influential factors affecting your business’ credit score is your credit utilisation ratio. This ratio (or rate) is a percentage measure of how much revolving credit you have used versus how much credit is available (also known as credit limit).
Credit rating agencies like CIBIL consider this ratio to calculate a company’s credit score. Most experts recommend maintaining the ratio below 30%. Loan refinancing can help you lower your credit utilisation ratio and thus increase your credit score. Needless to say, a higher credit score means increases your chances of getting loans in the future.
Check this article for a detailed guide on how to refinance your business loan.
7-Step Checklist to Refinance a Business Loan
Loan refinancing is a great option for some borrowers but not the best option for others. So, before you consider refinancing your existing loan, think about these considerations first:
1. Check if the loan provider offers refinancing facility
Not all Indian lenders offer a loan refinancing facility so before you make the decision to refinance, check if your lender does. It’s best to do this check when first applying for the (original) loan. When you do this, you will know that the refinancing option will be available to you if you need it in future.
2. Explore multiple offers before choosing one
Different lenders offer loan refinancing at different interest rates or repayment terms. Research these differences before selecting the lender and their offer. And before finalising your decision, do the maths to confirm that the new interest rate, repayment period, etc. will benefit you.
3. Compare the interest rates of the existing and new loan
The main purpose of loan refinancing is to reduce your repayment burden. This means the new loan should carry a lower interest rate so you can pay lower EMIs. So when considering refinancing, make sure the provider is offering lower interest rates and better repayment terms than your existing loan.
4. Check if pre-closing the existing loan carries a penalty
Some lenders penalise borrowers who refinance and pre-close existing loans. Ask your lender if they levy such a penalty. If they do, negotiate ways to reduce it so you don’t end up footing a loss (which will defeat the very purpose of refinancing). Also ask about processing fees and other costs. If these costs are too high, you may not get the savings you expected by refinancing the loan.
5. Check the status of your existing loan
In general, it’s best to refinance a business loan when you still have to repay a major amount. If you have already paid off a majority of the loan, you may not benefit much through refinancing. Plus, the process may be a hassle.
It’s also a good idea to consider the difference between the new interest rate and the current interest rate. Refinancing may not be worth the hassle if the difference is less than 1%. Also, check if the lender is willing to extend the repayment tenure and/or reduce the monthly repayment amount. If you are looking for either of these but the lender doesn’t agree, refinancing may not benefit you.
6. Check your credit score
You already know that your credit score determines your eligibility to get business loans. You should also know that it determines your eligibility to refinance existing loans. Check your credit score and confirm that it is in the desirable range (ask your lender if you’re not sure what they consider “desirable”) before initiating the refinancing process. Also, create a proper repayment plan to ensure that you can meet your new loan obligations, which will prevent a negative impact on your credit score in the future.
7. Check if you need to provide collateral and additional documents
In India, many long-term business loans are secured, meaning the borrower has to provide some collateral before they can access the funds. Ask your lender if you need to provide collateral to refinance an existing loan. If yes, they may not accept the assets you have already provided as collateral for your existing loan. In other words, you may have to provide additional assets as collateral.
In addition to collateral, the lender may ask for documentation to prove your creditworthiness and refinancing eligibility. They may ask for your business expansion plan, proof of credit utilisation ratio, etc. To avoid delays and possible application rejection, keep these documents ready before initiating the refinancing process.
Frequently Asked Questions (FAQs) About Business Loan Refinancing
Here are some FAQs many business borrowers ask about loan refinancing:
1. Does loan refinancing affect a borrower’s credit score?
The short answer is yes. Refinancing a business loan can lower your credit score for three main reasons. One, the lender (or lenders) will check your credit report to confirm your credit score and credit history. This “hard inquiry” on the report can cause the score to drop slightly. If you apply to multiple lenders over a long period (say, more than 45 days), each application will be treated as a separate inquiry, hitting your credit score. And third, refinancing means your existing long-term loan account will be closed, lowering your credit score.
2. Does refinancing help save money?
Yes, it does. In fact, the potential to save money and reduce the repayment burden is exactly why most business borrowers refinance their loans. You can save money by getting a loan that offers either a lower interest rate or a longer repayment period (with smaller EMIs per month).
3. Can I increase my working capital by refinancing a loan?
Yes, you can. Refinancing a loan will reduce your monthly EMIs so you will likely have more working capital in hand.
4. Do I need to provide collateral when refinancing a loan?
Most refinanced loans are secured, so yes, you will have to provide collateral when applying for such a loan. Also, many lenders ask for new collateral, meaning you cannot use the same assets you provided as collateral for the previous loan.
5. What kind of documentation should I provide for refinancing my loan?
It depends on the lender. Most lenders will ask you to fill out an application form. Many may also ask you to submit documents like your company’s balance sheet, cash flow statement, P&L statement, credit report, tax returns, and documents detailing your registered business address, GST number, business model, how you plan to use the new loan, etc.
6.Who is the best loan refinancing lender in India?
The “best” lender would depend on your refinancing needs and goals. Check with your existing lender what terms they can offer to refinance your loan. If these terms don’t suit your requirements, research other lenders and do a head-to-head comparison.
7. I only have a small outstanding balance on my existing loan. Should I still refinance it?
If you have already paid off a significant number of EMIs on your existing loan (so your balance is quite small), refinancing it may not bring you a lot of benefits. Plus, you may find the documentation and other processes a hassle. Check the outstanding balance on your loan and ask your lender if refinancing would be a good option for your business’ financial situation.
Get Easy Access to a Wide Range of Lenders with Yubi Loans
Applying for a business loan or loan refinancing can be a hassle. You need to talk to multiple lenders, gather information about terms and conditions, engage in individual negotiations, and prepare the required documentation. All these activities can take a lot of time – time that you can better spend on higher-value activities that benefit the business.
You can save all this time and effort with Yubi Loans, India’s leading corporate lending platform. With Yubi Loans, you can connect with hundreds of top lenders in India and access 12 loan products at competitive interest rates. The platform speeds up the end-to-end lending process and provides a seamless borrowing experience. This means you get the funds you need quickly without having to go through the tedium of talking to each lender individually and repeatedly. This fully-integrated, one-stop solution will help you negotiate deals that work in your favour and meet your debt requirements as easily as possible.
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