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One to the main sources of finance for businesses is a business loan. In order to fulfil business requirements like buying equipment, stocking inventory, financing payroll, business owners can approach a bank or a financial institution to sanction a loan. These loans are usually returned through EMIs. The next question that may come to your mind is can you refinance a business loan? Yes, refinancing a business loan is another way through which businessmen can manage their finances.

In this article we will discuss what business refinancing is, factors to consider for availing refinancing and how to refinance a business loan.

What is business loan refinancing?

Refinancing a business loan refers to the process of taking another loan with the existing loan provider to pay off an existing loan. The main advantage of taking a second loan is a lower interest rate and  flexible repayment terms and conditions. Businesses use the loan to pay off the debt of the previous business loan and also save a considerable amount with more affordable new interest rates.

Refinancing is a viable option but there are certain factors that you need to keep in mind before you consider refinancing small business loans.

While refinancing a loan:

  • Go in for a shorter or longer tenure
  • Select lower interest rates
  • Improve your credit score
  • Reduce your monthly EMIs

What are the factors to consider for availing refinancing?

A business loan refinancing if planned properly can offer several financial benefits and save you from financial burden. Business loan refinancing can also elevate your credit score. These are the important factors that you need to consider before availing refinancing as an option.

  • Ensure your bank offers this facility: When you approach a bank for a loan you need to ensure that the loan provider also offers the loan-refinancing facility. You will miss out this opportunity if your loan provider does not offer this facility.
  • Build your CIBIL score: CIBIL scores plays a major role in determining your loan eligibility. Though lenders require you to maintain a minimum CIBIL score for business loan application, higher your CIBIL score, the better is your chance for loan refinancing. Remember that every credit activity affects your credit score, therefore, have a proper repayment plan in order to prevent a negative CIBIL score in the future.
  • Compare interest rates: The main purpose of refinancing is to save in the old and new interest rates. So, research at the time of taking the first loan itself if your bank is offering a lower interest rate and suitable terms and conditions to avoid repenting later. Negotiate loan interest rates in both cases to ensure that you are getting the best offer.
  • Status of your existing loan: If you are finding it difficult to manage your existing loan, it is not very practical to take a second loan to avail lower interest rates. Carefully assess your financial status like the number of EMI installments, outstanding balance on your existing loan before you take a call.
  • Ask about the charges involved: The loan process involves paying the processing fees and file charges. Calculate these charges to ensure that you are not paying more in these just for a lower EMI. Make use of a business loan refinance calculator available online to find out the amount to be paid on your new loan.
  • Need for collateral: As most business loans are secured, it involves a collateral . Banks prefer to secure a collateral against a business . If you go for refinancing, you will require to provide another material asset. Make sure you can afford the same.

Types of loans that businesses can refinance

What are the 5 steps to refinance a business loan?

Refinancing of small-business loan involves the following steps:

  1. Goal setting: Decide what you want to achieve by refinancing before you opt for newer loan options as to whether it will lower your monthly payments, decrease your payment frequency or the cost of your debt. These answers will help you to streamline your search process.
  2. Calculate your debt from the existing loan: To get the best deal out of your refinancing process, understand the status of your current business loan and figure out the outstanding loan balance, the timelines, the payment schedule, the interest rates, and prepayment penalties, if any.
  3. Check your eligibility: Before you consider refinancing, of your business to understand the type of loan you qualify for. Factors like personal credit score, available collateral, cash flow, annual revenue, etc. contribute to your eligibility. This step will also help you to minimise your loan rejection rate.
  4. Compare loans for best option: Before you refinance your business loan, compare the different options available and decide on one that suits your requirements, offers most desirable terms like lower EMIs, longer repayment terms etc.
  5. Prepare your documentation well: Once you have selected the best option, it is time to compile the documents required for business loans and submit your business loan application. While the paperwork may vary, the following information are needed to secure a business refinancing
  • Details about you and your business
  • Bank statements
  • Tax returns
  • Financial statements
  • Debt schedule
  • Collateral

Conclusion: How best to plan for refinancing a business loan?

Refinancing of loans offer several benefits in the form of lower interest rates, better repayment tenures and more flexible loan terms. However, it also has disadvantages like an impact on your credit score, the processing fee involved, etc.  Therefore, weigh the pros and cons before making an informed decision on the refinancing of a business loan.

In case you need financial assistance, you can reach out to Tata nexarc for business loans that offers attractive unsecured loans from leading banks and financial institutions in India to meet your MSME’s financial needs. You do not need to visit multiple banks to find the lowest interest rates, repayment and EMI options. You can also compare the rates of various lenders and find the right option for your emerging business on the Tata nexarc platform.

Aditi Bhattacharjee

Aditi is a seasoned content writer with 8 years of experience crafting content for the Tech-driven businesses, and helping them in understanding the complexities in Saas-bases business growth. Her informative writing empowers companies to scale the product better and grow in this landscape.