What is Business Loan Refinancing?
Refinancing refers to the process of replacing an existing loan with another. Businesses seek loan refinancing to take advantage of lower interest rates, better payment schedules, and other cost-saving terms compared to their initial loan. Drastic changes in interest rates are one common trigger for loan refinancing, and such is the case in the country as of the moment.
The COVID-19 Pandemic and its Long-Term Effects on Business
Last January, the country announced its first local case of COVID-19 transmission. At the time, no one thought that the disease will affect our daily lives as much as it does today. The pandemic arguably now has medium to long-term effects in several aspects of society—including in business.
The majority of companies now operate in a work-from-home setup, replacing face-to-face meetings with video calls and moving office communications to online messaging apps. For businesses that need employees to be physically present in the workplace, company shuttles and lodging prove to be the solution.
However, the pandemic’s effects on businesses transcends work setups. Age-old companies shut down due to losses, millions of Filipinos lost their primary source of income, and even blue-chip stocks experienced massive drops in value.
Read: Small Business Endurance
BSP Lowers PH Interest Rates
To counter the downturn brought by the COVID-19 pandemic, the Bangko Sentral ng Pilipinas (BSP) has been actively implementing new policies to stimulate the economy. These changes mostly revolve on lowering interest rates, which aim to encourage borrowing and help local businesses stay afloat.
Read: BSP’s Monetary Policies in 2020
A Guide to Refinancing Your Business Loan
With interest rates on its all-time low, it is the perfect opportunity to consider refinancing your existing business loans. Whether you are seeking to consolidate multiple loans or simply enjoy better terms, read further for detailed steps that you can follow.
Step 1: Look For At Least 5 Lenders—Including Your Current One
Knowing your options (and having several ones) is the first step to business loan refinancing. Aside from local banks, include the Philippine government and private companies in your list of potential lenders. These financial institutions provide different types of loans:
- Term Loans
- Credit Line
- Secured Business Loans
- Unsecured Business Loans
Do your research and compare several lenders side-by-side. Check customer reviews from forums, consult comparison websites, and talk to colleagues with prior lending experiences. These will help you zero in on the best lenders for your needs.
Step 2: Request For Quotes
After finalizing your options, start getting in touch and requesting estimates. Keep in mind the criteria in getting the best quotation for your business loan:
- Credit History – Do you settle your loan payments on time?
- Cash Flow – How large and frequent are your company’s income and expenses?
- Character – Does your character exude that of a great leader?
Read: Smart Tips to Get Approved for a Business Loan
Once you have consulted other institutions, go back to your current lender and let them know about your plan to refinance. Ask them about the costs of closing your business loan and the whole refinancing process. As their current customer, there is also a good chance that your lender will provide a counteroffer to others’ quotations.
Step 3: Craft A Cost-Benefit Analysis
The best way to determine which new loan works best for your business is by comparing the pros and cons. Create a side-by-side analysis with all the information that you have gathered up until this point. These details include:
Principal Amount
Unless you have available cash and want to settle a chunk of your initial loan, your new loan should cover all of the previous one/s. Although, it is possible for other institutions to give you a larger principal amount, especially if your credit rating has improved. Consider if this is something that your business needs at the moment.
Interest Rate (Fixed or Variable?)
With the current interest rates on a low, it is advisable to choose a fixed loan rate. This shields your business from potential increases in interest rates when the economy returns to its healthy state. Meanwhile, a variable rate is best when interest rates are expected to decline.
All in all, this depends on the length of your loan repayment. In the short term, should rates further go down, a variable rate will be better. On the flip side, a fixed rate is more beneficial for long-term loans.
Payment Schedule
Compared to your current loan, how many years do you need to repay your new loan? A shorter payment schedule means higher monthly amortizations, but lower total interest payments. Meanwhile, you can stretch your budget with a longer term, but that will lead to higher total interest expenses.
Think of it this way: It is better to minimize total interest payments, as long as you can still comfortably settle your monthly dues.
Payment Methods
When getting a loan from a bank where you have an existing account, ask about automated deductions. It’s a time-saving setup for settling monthly amortization. For other institutions, check their accepted payment methods and see which is the most convenient for your business. Look for online channels for easy transactions anytime and anywhere!
Other Costs
As mentioned earlier, business loan refinancing involves closing fees and other extra processes. Make sure to compare these expenses from the cost savings you’ll get from refinancing. To gauge if the whole process is worth it, consider non-monetary resources like time and energy as well.
Step 4: Process New Loan
At the end of Step 3, you should be able to settle on the best course of action to take. If you have decided to push through with refinancing your business loan, it’s time to apply for a new one. The usual loan requirements include:
- Duly signed and accomplished Application Form
- Two (2) valid IDs
- Marriage contract (if applicable)
- Photocopy of Audited Financial Statements (at least 12 months)
- Latest Income Tax Return with BIR stamp
- Bank Statements or photocopy of passbook (at least 3 months)
- Business Background / Company Profile
- List and background of customers and suppliers
- Valid Business or Mayor’s Permit
- For Sole Proprietorships:
- Certificate of Business Registration issued by the DTI
- For Partnerships:
- Certificate of Registration issued by the SEC
- Articles of Partnership
- For Corporations:
- Certificate of Registration issued by the SEC
- Latest amended Articles of Incorporation and By-Laws
- List of Elected Officers / General Information Sheet
- Board Resolution / Secretary’s Certificate
Step 5: Pay Off Your Initial Debt
After your new loan gets finalized, go ahead and settle your initial debt/s. If your refinancing proves to be successful, you should now be enjoying better interest rates, more comfortable monthly payments, and an overall better debt structure.
Setting Your Annual Budget
Armed with a better debt structure, it’s time to put that extra capital to use. Whether for operations or investing in machinery, here’s how you should set your business’ budget for next year.
