There are many business owners who do not rethink of their business loan once it is taken. Many business loan borrowers go with a “set and forget” approach towards their business loan keep on paying the EMI till the tenure ends. But there is another kind of business loan borrower who likes to upgrade the loan with the growth of the business. The former’s approach towards the business loan keeps the loan constant until it is paid off whereas the later one brings add on facilities to their loan. A business loan refinance is one of the best methods of upgrading an existing business loan.
Refinancing your business loan may qualify for lower rates or better terms of your loan. One can merge a number of loans to one single loan by refinancing it.
What is a Business Loan Refinance?
Refinancing a business loan means when a borrower pays off the existing business loan with the proceeds from another loan which is ideally cheaper or comes with better terms. One can pay off more than one loan by refinancing. In other words, a loan refinancing can be defined as paying off the present loan in a lump sum with a new business loan. When you avail a new business loan, you adjust the EMI amount or the tenure of the loan as per your present financial condition. Moreover, most of the banks offer top-up loans when you apply for a refinancing loan. So refinancing gives you double benefit of better terms with an additional top-up loan.
Things to Consider Before Refinancing Business Loan
One can avail maximum benefit from a business loan refinance when it is done with some consideration. Let’s know the things you need to consider before refinancing your business loan.
Be Assured that Your Present Lender Allows Refinancing
Before you put your precious time and effort in processing a loan refinance, make sure that your present lender allows refinancing. Some business loan lenders don’t allow borrowers to refinance ongoing loans. If your lender is one of those, you will not be able to refinance your business loan.
Interest Rate Comparison
The interest rate offered by the new lender is the next thing to consider. A business loan refinancing needs a lot of efforts to put. In return, the borrower should get with a lower interest rate. A lower interest rate lightens the debt burden by less EMI amount.
Think Where Your Present Loan Stands
The benefit from your loan refinances depends a lot on the present condition of your existing loan. If you aim to merge your two or more loans together or you want to lower your EMI amount by extending the tenure, a loan refinance is helpful all the time. But if you want to save money by refinancing your business loan, you need to look at your present loan.
For most of the commercial loans, the initial payment goes towards the interest payment, and later towards principal repayment. So if you have already paid the interesting part of your loan, then refinancing of the loan will not help you to save more. Loan refinance saves a considerable amount of money only when it is done when the loan is still new.
Mind the Processing Fee
A loan refinancing is another name of applying for a new loan. Just like availing a new business loan, you will have to pay a couple of charges. The fees that a borrower is expected to pay includes an origination fee, application fee, lender fee, appraisal fee (if commercial property is involved), and a prepayment penalty to the previous lender etc.
Understanding the fact, the borrower must calculate all those fees and subtract it from the profit to find the actual amount that can be saved. If you find that the amount saved by refinancing is not much, it is better not to invest time and effort for a nominal profit.
Think Twice About Credit Score
Every credit activity makes its impact on credit rating including the loan refinance. The loan refinancing process closes the older loan and opens up a new credit account. Shopping for a new loan may ding your hard earned credit score. Moreover, older loans hold more value than new ones. So the chances of damaging the credit score are always present while going for loan refinancing.
The Bottom Line
Business loan refinancing is an effective way to manage your loan(s) better. One can get rid of expensive business loans by refinancing it. One just needs to evaluate the refinance option realistically so that maximum benefit can be earned by transferring the loan to a new lender.