Refinance can bring one or more advantages to your business. Refinance can be used to have more working capital in the business or to move to a more stable financial outgo by shifting from a floating rate loan to fixed-rate loan. It can even free up some equity in the business which can be used in a different way. Refinancing is basically retiring your exiting loan with a new one by paying off the existing one.
However, refinance exercise is not always a very easy and involves complex paperwork. A refinance of an existing loan should be done after careful analysis of the present situation vis-a-vis the benefits that the new loan can bring.
Here are a few things you must know before you decide to refinance:
1 Credit Score: Lenders like banks and NBFCs have raised their standards for accepting loan applications and approvals in the recent past. They really want to make sure that the borrower will be able to repay without any default. You should not be surprised to see your loan application being turned down even if your company has a decent credit score. Lenders now-a-days want a really good credit score and any financial difficulty faced by you business in the last 12-24 months is enough for the lenders to deny approval of the loan. You must find out what is your credit score and whether you will be able to secure a loan at low interest rates or not.
2 Debt-To-Income Ratio: Debt-to-income ratio is another important consideration for the lenders these days. They don’t just look credit score, they also look at debt-to-income ratio of your company. If you already have sizable loans or debts in the name of your company, lenders may decline your loan application.
3 Refinancing Costs: It is important to find out the costs involved in the whole refinance process. There are costs in availing a loan and it is usually between 3 percent and 5 percent. If the objective of refinancing is to lower the monetary outgo by shifting to a lower interest rate loan, then will the new loan serve the purpose even after accounting the ‘overheads’ in availing the new loan? This is the question you will have to ask yourself before taking the decision to refinance.
4 Break Even Point: What is your break-even point, the point of time at which your costs of refinancing have been met by your monthly savings through new loan? This is an important question when going for refinancing. This can be explained with the an example: Let’s say, your refinance costs you Rs 1 lakh per month and you are saving Rs 5,000 per month with the new loan, then the break-even point will be 20 months. If you plan to sell your property in about 20 months then refinance may not make that much sense.
5 Taxes: When you purchase a commercial property through loan, then your company is eligible for tax deductions on the interest component of the EMIs. When you refinance and have the advantage of lower interest rates, then the lower interest outgo will also make you less eligible for tax deduction. These minute points should be calculated before you choose to refinance.
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