Things you should know before refinancing your existing business loan

Running a business loan at high interest rates can feel like a financial burden. If you are thinking of switching your business loan to save on interest, consider refinancing. It is a smart strategy when done right, but only if the interest rate gap is big enough for your lender to offer better terms. 

Sounds confusing? We’ll explain in simple terms.

To begin with, you must understand that refinancing can help you combine multiple loans into one. It can also help increase your principal loan amount if your asset value has risen. But when should you really go for it? Check out this guide for expert tips and practical advice, and learn everything about refinancing loan.

What is Refinancing?

Refinancing is when you take a new loan to replace an old one. Many people choose to refinance when they want to save money or manage their loans better. The new loan usually offers better interest rates, a longer repayment period and flexible terms. Sometimes people also refinance to get extra cash by borrowing against the value of their asset. It’s a smart move when done at the right time and for the right reasons. It is often used by homeowners, business owners and anyone looking to ease financial pressure.

What is Business Refinancing?

Business refinancing or corporate refinancing happens when a company changes or replaces its loans with new ones that are comparatively easier to handle. This helps lower costs, reduce financial risk and manage cash better. Sometimes companies in trouble also refinance to fix their finances. It is a common move to keep the business running smoothly and plan for future growth.

Benefits of Business Refinancing 

The following are the benefits of business refinancing:

1. Lower interest rates: It helps reduce the overall loan cost.

2. Better loan terms: Easier repayment with longer tenure and smaller EMI.

3. Improved cash flow: Frees up money for daily operations or new projects.

Types of Refinancing

Refinancing has certain types. They are:

1. Rate and Term Refinance

A rate and term refinance allows you to change your mortgage interest rate, your loan term or both without increasing the total loan amount. Your loan amount doesn’t change, but you can reduce what you pay every month or shorten your pay timeline, depending on what you choose.

2. Cash Out Refinance

A cash-out refinance leads you to borrow more than your current home loan. You get a bigger loan, which can be used for any purpose. This doesn’t add another bill, but your monthly payment may be higher or lower than before.

4. Cash In Refinance

A cash-in refinance involves paying extra towards your loan during refinancing. This can improve your loan terms, build more equity, and get you a lower loan-to-value ratio.

5. Streamline Refinance

Streamline refinance, like FHA and VA, allows loan holders to refinance with minimal paperwork, avoiding an appraisal. 

Documents Required for Refinancing

The following documents are required for refinancing loans:

Top Tips to Consider Before Refinancing a Loan

Here are some top tips to consider so that you can manage the refinancing process with ease:

1. Impacting CIBIL Score

Refinancing business loans results in a hard inquiry on the CIBIL score. Hence, it is advisable to apply for refinancing only if the borrower has a high CIBIL score and has maintained a repayment record. Refinancing impacts the CIBIL score, and if the lender finds fault in the credit score, then it will affect the credit score badly. It is important to maintain a CIBIL Score higher than 700 for hassle-free loan disbursement.

2. Interest Rate Comparison

A borrower opts for refinancing when another lender is offering a lower interest rate. But a borrower should compare all the interest rates and check the processing fee for refinancing a loan. It is always good to check and compare rates of interest, processing fees, and other charges before refinancing any loan.

3. Collateral

Usually, all long-term business loans are secured, which means that they need collateral as security. The notable fact here is that the asset kept as collateral is not transferred to the new lender in case of refinancing. Instead, the borrower should keep another collateral as security for refinancing. That’s why one should inquire about collateral to the current lender.

Pros and Cons of Refinancing

The following table depicts the pros and cons of refinancing loans: 

When Should You Consider Refinancing?

Business refinancing is a crucial decision and quite a hard nut to crack. Choose the option of refinancing only under the following conditions. 

• The difference between the current rate of interest and the new rate of interest is higher than 1 per cent.
• When the lender is offering an extended tenure period and a lower equated monthly payment (EMI).
• When the mortgage property value has increased, you want to refinance the loan with a higher principal.

Conclusion

Now that you have a better understanding of refinancing, it’s time to take the next step. Refinancing can offer great financial advantages, but only when done at the right time and with the right terms. 

My Mudra is here to simplify this process, offering fast refinancing options and helping you make informed decisions with us. 

You can achieve better loan terms, lower interest rates, and extra cash flow. We offer quick and hassle-free solutions to reduce your loan burden and help you save money in the long run.

Also Read: Small Business Loan: Quick Funding with Low Interest Rate