How Refinancing Your MSME Loan Can Reduce Your Costs

Refinancing your MSME loan is a great relief in case paying your lender is becoming a struggle. Know what is refinancing & why it is important!

12 Sep,2022 11:56 IST 4 views
How Refinancing Your MSME Loan Can Reduce Your Costs

Money is the lifeline of business enterprises, irrespective of their size or the goods and services they provide. To meet the financial requirements, entrepreneurs can either infuse equity capital into the business or take a loan from a bank or non-banking finance company.

A business loan is the best option if the owners don’t have enough equity capital or don’t want to sell their assets and dilute ownership when they need funds. A loan is even more useful for micro, small and medium-sized enterprises (MSMEs), who often don’t have enough assets to put up as a collateral or strong cash flows.

MSME loans are typically collateral-free business loans that a startup or a business establishment can take for meeting business expenses. These loans are mostly used for short-term requirements. To be sure, MSMEs can also take a secured loan, which requires a collateral, if they need a larger amount for a longer tenor.

After taking a loan, if a borrower wants more favourable terms to make repayment easier, they should think of refinancing. This refers to replacing the outstanding balance of an ongoing debt with a new loan on fresh terms.

Borrowers usually refinance to get a loan for a longer term with lower monthly payments. Investing time and energy to refinance an MSME loan helps to reduce costs in the following ways:

Lower The Interest Rate:

Most borrowers consider refinance when interest rates fall. Lower interest means more savings and more money in hand.

Some borrowers simply refinance to switch from variable to fixed rates or vice versa. When interest rates are decreasing, a variable rate is better. But in a variable-rate interest loan, there are equal chances of an increase in the interest rate. To mitigate the risk factor, borrowers may prefer to switch to a fixed interest rate.

Change The Tenor:

Loans are liability and the sooner they are cleared, the better. A cash surplus due to higher income, profit in business and long-time savings can be used to adjust the tenor of the loan. Changing the duration of the loan term gives more freedom to diversify the usage of the monthly budget.

Choose A Different Loan:

To cater to the differing needs of MSME units, most banks offer a variety of loans like term loans, overdraft facility, invoice discounting, etc. Refinancing gives the MSMEs a chance to find the best loan type as per their need.

Get More Cash:

Refinance helps to obtain more funds. Though small loans for shorter terms may be tempting, refinancing can be an easier way to secure additional funds and to consolidate all smaller debts.

Conclusion

Refinancing helps to clear off old debts with a substitute loan offered at favourable terms than the original debt agreement. Refinancing could be a good option for those who want to change the loan rates or the tenor.

Before refinancing, interested applicants must weigh the current debt liabilities against the terms of the new loan. Sometimes the fresh loan terms are overshadowed by the foreclosure charges on the existing loan. Consequently, it is important to calculate the cost of refinancing to make the whole process meaningful.

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