Business Loan Balance Transfer, Foreclosure and Prepayment Guide

A Business Loan balance transfer allows the borrower to shift an existing loan from one lender to another. Business Loan foreclosure means repaying the entire loan amount before the loan tenure ends. Business Loan prepayment involves paying a part of the loan amount before the due date.

All three options help reduce the borrower's loan repayment burden. In this guide, we shall explore how each option works and when it makes sound financial sense to use them.

What is Business Loan Balance Transfer?

A high interest rate and rigid repayment can strain the business's cash flow. Under such conditions, a borrower can opt for a balance transfer. It involves shifting the existing Business Loan from the current lender to a new lender offering a lower interest rate. The new lender repays the outstanding loan amount to the existing lender on the borrower’s behalf.

This is especially suitable when the new lender offers competitive interest rates or better repayment terms. It improves business liquidity and reduces monthly outgo.

When Should One Consider a Business Loan Balance Transfer?

A balance transfer may not be a suitable option for every borrower. There are specific financial conditions under which this option works best.

One should consider a balance transfer if:

• Competitive rates on business loans are available in the market

• The borrower's business credit profile has improved

• The current lender has rigid repayment terms and limited flexibility

• Business operations are getting affected due to the cash flow pressure

• The new lender is offering better service, better benefits, or special schemes.

Costs Involved in a Business Loan Balance Transfer

A loan balance transfer cannot be done free of cost. There are certain applicable fees associated with the transfer, which include:

• Foreclosure Charges: Applied by the existing lender, who treats the balance transfer as an early loan repayment.

• Processing Fees: Charged by the new lender for the loan processing.

• Documentation and Other Administrative Costs: Charged by the new lender while completing the balance transfer.

Borrowers should carefully calculate the total cost of these charges against the expected interest savings. Opting for a balance transfer is helpful only if the overall savings outweigh the associated costs.

What is a Business Loan Foreclosure?

The full repayment of the outstanding loan balance before the end of the Business Loan term is referred to as Business Loan foreclosure. According to the terms of the loan agreement, lenders may impose foreclosure fees. These fees are usually computed as a percentage of the remaining principal. It should be made explicit to the borrower at the time of loan approval.

When to Choose the Business Loan Foreclosure Option?

One should choose the foreclosure option when surplus funds are available. Also, it should be done early in the loan tenure, as interest savings are higher then. However, one must carefully evaluate applicable fees and business liquidity, as foreclosing in the later stages offers limited savings.

What is Business Loan Prepayment?

Prepayment of a Business Loan is the act of making partial payments before the loan's due date. In contrast to foreclosure, it involves paying just a part of the loan amount rather than the full amount.

By lowering the outstanding principal, prepayment lessens the burden of future interest payments and EMIs. Lenders may impose prepayment fees based on the loan terms and the repayment stage. It is crucial to read the loan agreement carefully before deciding, as loan prepayment fees vary depending on the lender's policies.

When to Choose the Business Loan Prepayment Option?

When you have extra funds and want to lower your future interest and EMI burden, the Business Loan prepayment option is the ideal solution. Before making the prepayment, always consider your business liquidity and lender fees.

Key Differences Between Business Loan Foreclosure and Prepayment

Both options allow early repayment; however, they operate differently. Here are the key differences between the two:

Understanding the key differences between the two helps in decision-making, leading to better business financials.

Common Mistakes to Avoid While Managing Business Loans

Even with the right options like prepayment, foreclosure, or balance transfer, many businesses make avoidable mistakes that can increase costs and strain cash flow.

Common mistakes to avoid:

• Overlooking processing fees, documentation charges, or applicable fees.

• Making early payments without checking the business's cash flow or liquidity.

• Failing to compare offers or Business Loan interest rates before considering a balance transfer or prepayment.

• Neglecting to maintain a good credit score. This affects future loan eligibility.

• Borrowing beyond business needs or exceeding the maximum loan amount.

• Not tracking fixed monthly payments and monthly EMIs across multiple loans.

• Missing opportunities to restructure or consolidate multiple Business Loans.

• Applying for loans without submitting the necessary documents or KYC documents.

To Conclude

We've explored the three important ways businesses can reduce their financial burden. Before selecting the best alternative, a business owner should thoroughly consider their present financial situation, cash flow, and future business needs. Making wise choices promotes sustainable business growth, improves loan management, and reduces interest expenses.

Choose the right loan partner for a seamless borrowing experience. Apply for a Business Loan with Poonawalla Fincorp today and benefit from quick approval, flexible repayment options, and competitive interest rates.

Read Also: How Business Loans Take Your Business Higher?

FAQs

Is it possible to do a Business Loan balance transfer during a fixed tenure period?

Yes, it is possible to do a balance transfer during the fixed tenure. However, foreclosure charges may apply.

Is GST applicable to foreclosure or prepayment charges?

Yes, GST applies to the charges levied by the lenders. It adds up to the Business Loan rates and the total payable amount.

Does balance transfer demand revaluation of business assets?

Asset revaluation may be required for secured loans. Unsecured Business Loan offers usually don't require any reassessment.

Are start-ups eligible for Business Loan balance transfer?

Eligibility criteria consider a good credit score, good repayment history, revenue consistency, and the financial stability of a business. Not all financial institutions support start-up loan transfers.

Can prepayment be reversed once processed?

No, prepayments are usually irreversible. Funds are permanently adjusted against the principal loan amount in the bank account.