Taking out a business term loan can be an invaluable source of funding to help SMEs grow the business. A business term loan is a type of financing that provides SMEs with access to capital over a defined period of time. It can be used for various purposes such as expanding operations, purchasing equipment or inventory, or refinancing debt. When refinancing existing debt, businesses can reduce overall interest payments and improve cash flow. Here, we will explore the basics of refinancing, 5 pros and cons of refinancing your SME business term loan in Singapore, and finding the right lender for your business needs.
What is Refinancing
Refinancing is the process of replacing an existing loan with a new loan that offers different terms, such as a lower interest rate or longer repayment period.
As businesses evolve and grow, there may come a time when refinancing is necessary in order to secure more favourable terms and better meet the needs of your enterprise. You may have considered refinancing your SME business term loan in Singapore.
However, while the potential benefits of refinancing are attractive, it’s important to note that refinancing isn’t always the best solution for every small business as there may be fees associated with the process, or if you’re already struggling with repayments. Nonetheless, if you’re looking to reduce overall costs and improve your cash flow, it’s worth considering refinancing your small business loan.
To help you make the best decision for your business, here is a list of five pros and cons of refinancing an SME business term loan in Singapore.
5 Pros and Cons of Refinancing your Business Loan
1. Lower interest rates
Refinancing your business loan can often result in lower monthly payments due to lower interest rates than when you first took the loan, which can save you money over the life of the loan. With that said, not all lenders offer lower interest rates to all borrowers. Individual company assessments are still required to determine the final interest rates.
2. Improved cash flow
With lower interest rates, you’ll have more cash available each month to use for other expenses or investments. This can help improve your overall financial situation and put you in a better position for future growth opportunities.
3. Flexible terms, Longer repayment period
Refinancing may also give you more flexible repayment terms than what was available when you first took out the loan, allowing you to adjust the length of your loan or make other changes that work better for your budget. By extending the repayment period, you may find that your monthly payments become more affordable. This could give you additional time to pay off the loan without having to worry about high monthly payments.
4. Access to additional funds
When refinancing your loan, you may be able to access additional funds for additional business expenses or investments without having to take out another loan or use credit cards with high interest rates.
5. Potentially higher credit score
Paying off your existing loan with a new one may improve your credit score, as long as you make all of your payments on time and in full. A good credit score indicates to lenders that your small business has a history of responsible financial management, which makes them more likely to approve larger amounts on loan applications and offer lower interest rates.
1. Fees and Charges
There are often fees associated with refinancing a business loan in Singapore, such as processing fees, which must be taken into consideration when deciding whether or not it is worth doing so for your particular situation. These fees could add up over time if you do not account for them in advance when calculating how much money will be saved through refinancing.
2. Longer repayment period, higher total interest
Depending on the terms of the new loan agreement, you may be offered a longer term in order to keep your monthly payments low. This means that although you may pay less each month, you will end up paying more in total interest over the life of the loan if not managed carefully.
3. Early repayment penalties
Some lenders may charge early repayment penalties if you decide to pay off your loan sooner than expected or refinance before a certain amount of time has passed since taking out the original loan. So, make sure to ask about this before signing any agreements so that there aren’t any surprises down the line if you need to pay off early due to changing circumstances.
4. Increased risk of defaulting
Refinancing could mean a longer repayment period in total and a potentially higher total interest to be paid. If you default on your loans, meaning you are not able to make your repayments on time, this could have serious consequences for you and your business, both financially and legally. Make sure that any potential savings are worth these risks before going ahead with refinancing.
5. Increased risk of losing of collateral
If your business has used collateral to secure the new loan, you may lose the collateral if you are unable to repay the refinanced loan. This means that if your business fails to make timely payments on the loan, the lender has the right to take possession of any assets pledged as collateral in order to recoup their losses.
Refinancing a business term loan can provide numerous benefits but also comes with some potential drawbacks that you must consider carefully before making any decisions about whether or not this option is right for you and your company’s needs. When done correctly, refinancing can provide SMEs with an opportunity to reduce your financial burden while still allowing you access to the capital you need in order to grow your business.
Finding the right business loan
The best business loan for SMEs who often require financing urgently is ideally the one with the most suitable terms and fastest disbursals. Finding the right business loan can be a difficult process. As a decision maker, it is important to understand the different types of loans available, their advantages and disadvantages, and how they can help your business grow.
Take the time to compare different types of lenders, and find the best rates and terms that fit your needs. With careful research and due diligence, shopping around can save you money in the long run and ensure that you find the best business loan for your SME.
Disclaimer: The information provided to you in this blog post is intended only for general information purposes only and does not constitute legal or other professional advice on any subject matter. The materials and the information provided are not intended to be and do not constitute an advertisement or solicitation. In no event will Funding Societies be liable to any party for any direct, indirect, incidental, special, consequential or punitive damages for use of such information by you or any unauthorised third party.