According to the CRIF High Mark’s How India Lends report, the financial institutions in India sanctioned a staggering amount of Rs. 64.1 trillion as business loans to the Indian MSME industry in the financial year 2024. Though revenue growth may arrive at a later stage, businesses need capital to run their businesses from the initial day itself.
Businesses who have availed business loans carrying higher interest costs in the past might be losing a significant chunk of their revenues towards repayments. Lack of flexible terms along with budgetary constraints might add to their financial woes. In such circumstances, businesses might consider switching business loans balance transferred to another lender with better repayment terms.
Business Loan Transfer – Explained
Accordingly, business loan restructuring or loan transfer implies the process by which businesses migrate to a different lender with more favorable terms to reduce debt burden and enhance operating capital. For instance, ABC Pvt Ltd may be allowed to move its commercial loan from ICICI Bank to SBI Bank upon negotiating attractive loan terms, even though the business loan was originally taken out at a higher interest rate.
Transferring the balance of a business loan inevitably results in improved loan terms, such as reduced interest rates, extended repayment durations, or even enhanced client support. Similarly, a business debt could be transferred if the existing owner sells the company, including its assets and obligations.
Common Reasons Businesses Consider Business Loan Transfer
Better Loan Terms-
As mentioned earlier, replacing business loans may lead to lower interest rates, which might boost business cashflows and alleviate financial stress.
Fixed or Floating Rates-
Businesses wishing to switch their loans from fixed interest to floating interest rates and vice-versa might benefit from loan transfers.
Improved Customer Service-
Terrible customer service, procedural delays, and inadequate transparency constitute typical challenges for businesses seeking capital. Businesses switch lenders for improved customer service, automated loan processing, faster responses to their queries, or more user-friendly platforms. Businesses might prefer lenders offering effective financing solutions that minimizes time and avoids unnecessary delays.
Better Cash Flows-
Transferring a business loan from one lender to another facilitates a cheaper interest rate. Reduced EMI burden helps to lower cash outflows leaving more funds available for working capital. Such gains could be used to improve operational needs, hire more staff, increase marketing, or procure stock, etc.
Loan Consolidation-
Businesses who have availed multiple business loans at the same time could consider business loan transfer through loan restructuring. Loan restructuring enables the aggregation of multiple debts into a single one. It allows the borrower entity to simplify loan repayments, lower interest rates, plan and monitor budgets, etc. It assists businesses to reduce unnecessary costs and maintain financial discipline.
Business Loan Transfer and its Steps
Process of Bank Loan Balance Transfer
Enumerated below are the steps involved when a business entity or SME borrower, decides to transfer its existing business loan from one bank to another.
Step 1. Examine existing business debt
Business entities should start the process by assessing their existing business loan with the lending organization. Analyze factors such as applicable interest rate, interest owed, repayment schedule and total duration, loan terms and conditions, pre-closure penalties, etc. All of this will help to make the decision whether to continue the existing loan or transfer it to another lender.
Step 2. Research credible Lenders
Once the business entity has analyzed all the factors and decides to transfer the balance loan to another lender, then it should research different lenders available in the market including their offerings. It would be a good idea to create a list of eligible lenders including (banks, NBFCs and digital lenders) that offer debt refinancing options.
Classify these lenders on the basis of elements such as consumer feedback and market perception to narrow down the list of right lenders. Finally, compare them on the basis of factors such as loan products offered, applicable interest rate, flexible repayment terms and processing period involved.
Step 3. Check whether the business entity fulfills eligibility
Before applying, carefully review the new lender’s qualifying requirements. Most of the lenders will check repayment history, business turnover, credit score, and financial stability of the applicant business. Make sure it meets all the eligibility requirements, such as the minimal loan transfer sum, business age, sales revenue, and necessary documents.
Step 4. Submit a new loan application
Fill out the loan transfer application shortly after choosing an eligible lender. Submit necessary documents along with application i.e. bank statements, audited financials, GST filings, KYC information, and particularly relevant loan agreement. Also, mention about the existing business loan details and necessary terms.
Step 5. Understand applicable penalties and hidden charges.
Before executing a loan transfer, review all expenses, such as administrative fees and penalties for prepayment, which goes beyond interest rates that protects borrowers from any unexpected charges or costs. Additionally, seek explanation for any ambiguous clauses and request a thorough breakdown of expenses.
Step 6. Receive approval and transfer Loan to another bank/Lender
On receipt of the loan application, the lender will review the details. Once it satisfies the loan eligibility criteria has been met by the applicant, it will approve the business loan. Post entering into the loan agreement and deciding terms, it will initiate the process of debt transfer paying existing loan and starting a new loan account essentially completing the debt transfer process.
Benefits of Business Loan Balance Transfer
Relieving the financial burden-
Switching business loans between lenders, especially when the business has been sold and liabilities are transferred along with the assets, reduces cash flow strain for borrower business.
Reducing liability and Potential Savings-
One of the key benefits of transferring business loan balance is the prospects of saving interest costs for the borrower business. It’s always possible that the borrower business is paying more interest than it should, and transferring loans offers an opportunity to get business loans at lower interest rates.
Improved Credit Score-
A strong repayment history can assist to improve the borrower’s credit score. Transferring debt from one financial institution to another adds a new loan to the credit history, and a strong commitment to pay for the same will help the borrower entity to raise the credit score even more.
Efficient Debt Management-
Several businesses raise debt from multiple lenders simultaneously which results in mixed debt exposure leading to an overall increased cost of capital for existing debt. Therefore, restructuring debt to reduce credit exposure may be facilitated by transferring a business loan. Additionally, new loans can provide access to improved debt management tools and processes, guaranteeing seamless funds and debt management.
Eligibility Criterion for Business Loan Balance Transfer
- Current Active Business Loan-The applicant needs to have an ongoing business loan with a regular repayment history of twelve months or more.
- Outstanding Loan Amounts- Certain lenders have a certain ceiling on credit limits. Thus, check whether the balance loan on existing business loans is between (Rs. 5L-50L) which is generally the loan limit for small scale businesses.
-
- Good Credit Score- A healthy credit score demonstrates responsible financial management making it the first choice for lenders. Typically, a credit score of 700 or more is accepted by various lenders for loan transfer purposes.
- Stable Financial Health- Maintain stable cash flow, healthy revenue and a clear balance sheet. It gives the new lender belief in the borrower’s ability to make timely repayments.
- Collateral Requirement- While some lenders might not necessitate collateral, others may need certain collateral particularly when transferring high-value loans. The collateral requirement might vary depending upon assets like real estate or equipment, investments, etc.
- No loan default- The business organization must not have fallen behind repayments on the existing loan. Loan repayments made beyond due date or any non-compliance of applicable processes might have an adverse effect on the loan transfer process.
- Legal Compliance-The business shall be fully compliant with applicable laws with no legal disputes that could compromise with the loan transfer procedure.
Points to Keep in Mind Before Transferring Business Loan from One Bank to Another
Review existing loan terms-
Certain loan terms and conditions have a far- reaching impact than initially assessed by business owners. Thus, examine terms such as interest rate, length of payments, pre-closure penalties, and general terms and conditions with existing debt.
Transfer Costs-
Identify fees associated with early repayment for loans since these expenses will be taken into account while switching business loans. It is necessary to carefully consider all the positives and negatives of the loan transfer process to determine whether transferring a balance loan would be beneficial for the business.
Evaluate New Lender Credentials-
Assess the new lender’s track record with aspects such as customer service, financial soundness, and lender reputation. Also, comprehend the new loan’s terms and conditions along with the loan approval procedure for faster application processing.
Communicate with Existing Lender–
Notify present lending institution regarding the intention to switch balance business loan and collect any relevant documentation i.e. No objection certificate, etc.
Difference in Interest Rates-
Since interest rates affect EMI, cash flow, and repayment, seek out substantially lower interest rates. Also, verify the entire repayment costs including fees and other charges actually contribute to cost reduction.
Loan Tenure-
While a prolonged loan tenure can lower monthly repayments, it may also result in higher overall interest payments. Prior to choosing a lender, analyze whether the longer repayment period could influence long-term business growth.
Verify Balance Transfer-
Following the conclusion of the loan transfer process, check whether the right sum has been assigned to the prior lender and the loan file has been closed with them.
Common Roadblocks Faced While Loan Transfer and Ways to Overcome
Not Comparing many Lenders-
When researching lenders, it’s important to compare many offers to avoid missing the chance to get an improved offer. Businesses should compare banks and non-banking financial institutions to obtain the best conditions for business.
Choosing the wrong loan for the business-
Choosing a loan that does not fit the company’s requirements or financial status may give rise to repayment challenges. Research several loan offerings to ensure that the loan chosen satisfies business fund requirements as well as lender’s qualification criteria.
Overstating Loan Requirements–
Securing a larger loan than needed can result in excessive debt and repayment concerns. Use resources such as credit EMI calculations to figure out a workable payback schedule on the basis of business cash flows.
Ignoring Transfer-Related Costs-
Borrowers frequently overlook transfer fees, which is one of the most common errors that leads to surprisingly high expenses. Lenders may impose a transfer fee for migrating an existing debt with a different bank to one of their loan files. Thus, borrowers should also take into account such to examine overall benefit from loan transfer process
Neglecting Long-Term Financial Objectives–
A business borrows funds to meet their commercial endeavors or similar objectives. Irrespective of their term, business loans are always linked to their long-term financial objective. Transferring loan balance from one to another might jeopardize such objectives due to involvement of numerous factors such as repayment duration and schedule, borrowing costs, loan terms and conditions may change over time. Thus, it would be beneficial for the borrower entity to undertake proper evaluation regarding the manner in which a debt transfer will affect the long-term financial objectives.
Not consulting a financial advisor–
Whenever it pertains to financial worries, it is always wise to speak with subject matter specialists. Business owners or entrepreneurs may be unable to comprehend the nuances of loan transfers which might lead to financial loss or credit score reduction. Hence, business loan transfer without proper advice might be a risky move. Assistance from financial experts could help to decide the benefits and drawbacks involved with the transaction.
Make an Informed Choice
Therefore, business loan balance transfer is a calculated choice for businesses who wish to minimize their financial woes, save monies for businesses uses and achieve their long-term financial goals. Business loan balance transfer can positively impact cash flows and enable financial discipline for the borrower businesses. However, to make the most out of business loan transfers, businesses need to make the right choices for lenders with favorable terms.
FAQs
Can a business transfer its business loans to any lender in the market?
Yes, but it is advisable for the borrower to review the potential benefits and drawbacks, and make a knowledgeable choice. It can be harmful to make a snap choice to transfer a debt without carefully weighing all the options.
Is the business loan balance transfer chargeable?
Yes, It should be kept in mind that the business loan balance transfer process is not free of cost.
What are the fees levied in relation to business loan balance transferred to another lender?
Processing fees, prepayment penalties, and loan closing fees with the existing lender and several costs are charged during the process.
What impact does transferring a business loan have on a business credit score?
Transferring business debt may affect credit scores in both negative and positive ways. Though it will undoubtedly add to the recent hard inquiries, timely payments will help overcome this negative impact.