Should You Accept the Business Loan Top Up Offer?

Do you have an existing business loan that is almost paid off?  When you have paid a substantial portion of your loan (say around 30 to 50 percent of the original loan amount), your banker might offer you an additional loan top up.

Amount of additional financing offered may vary but most probably, the minimum loan amount offered will be at least equal to the portion of the existing principal amount you’ve repaid so far.

This may appear favourable to you because not every existing borrower is offered additional loans. In fact, there will definitely be more companies that have their SME loan applications refused than approved.

The banks probably view you as a borrower in good credit standing thus, willing to take the risk by increasing loan exposure to you.

Some banks’ credit policy is such that you might not even have to go through any round of risk assessment and application should you accept the new funding offer.

This makes it an extremely enticing proposition. This is especially so if you’ve gone through at least one financing application before and you know that the process and documentations could be quite tedious.

But the big question is, should you avail of that additional loan?

Below are four critical considerations you should look into before saying yes to that new loan.

Need for fund and fund types

 Are you really in a situation where you need a new SME loan?  If so, you must have a plan on how to best to use it. You should know what your new ROI will be.  Ultimately the loan is not interest free and you should have a plan how to effectively deploy the funds to at least make a positive return on the interest paid.

However, if you just coincidentally happen to need funds for the short term, then you could be in a better position if you just apply for a short-term credit line instead.

This type of revolving credit facility such as business overdraft or trade financing facilities gives you access to ready cash only when you require it. Interest will be charged only on the amount you draw down and the time period the account remains overdrawn.

Unlike the typical business term loan which is non-revolving in nature, interest will be effected on the whole principal amount the moment loan is disbursed to you.

If you have established the need for fresh funds, the next consideration is if the fund usage matches the loan tenure.

For instance, you’ve decided you need to buy a commercial space.  You will need some financing over the medium or long-term for a commercial property loan.

In this case, it is unfeasible to avail of a short-term credit line. Credit lines are usually for short term use only and rolling over unpaid balances could balloon up the interest portion significantly.

Being so, a medium to long-term commercial loan is a far better type of loan for this particular purpose.

Improvement in credit rating

Availing of a new or additional loan after substantially paying off a large portion of your current loan can boost your company’s credit grade which your existing banker scores you on.

Certainly, a new loan from the same lender means you are a good borrower.  Moreover, you can prove once again that you can repay this new loan promptly.

Having a string of satisfactory payment record is a feather in your cap.  This is especially valuable if you have started out as a borrower with very little credit history.

Also, your creditworthiness will also be put to good use when you approach other lenders looking for good paying clients by furnishing your loan repayment statements detailing prompt payment records.

Terms and interest rate offered

If you have been a creditworthy borrower, you should be able to bargain for payment terms that are also favourable from your end. Same goes with the interest rate.

Since you are a repeat client, it means you are somewhat more valuable to the bank versus a brand new borrower with no existing credit repayment record.

This gives you an edge and you can leverage on your creditworthiness to negotiate for better loan terms. The thing is, is your lender willing to give you preferential rates this time around?

Some borrowers avail of new loans to prepay their outstanding balance and in the process negotiate for a rate adjustment. The banks might not want to cannibalize on their existing loans by offering you lower interest rate to offset your existing loan.

If however your banker indeed does offer better rates this time round, make sure that you have checked your previous loan agreement.  Some contain provisions where the borrower is charged penalties and fees for prepaying a loan.

Terms and interest rate offered by other banks

Do not be blinded by what your lender is offering.  Do your homework by comparing the loan terms offered with that of other lenders out there. You can compare all small business loans in Singapore easily with our free online loan assessment tool.

The market could be soft and banks might be more aggressive in acquiring new accounts. There might be a drop in the overall market’s interest rates and the banks might be looking to ramp up their loan books volume with the lower cost of funds.

If other lenders are willing to offer you better terms, analyse if a new loan from this new lender would be less costly. You can apply multiple business loans concurrently from various banks to compare their offers. Again, consider prepayment penalties and fees for existing loans and factor in also processing fees to be paid anew in the case of a new loan from another lender.

Another factor to consider is the relationship between you and your relationship manager or the bank itself.

If this is the first bank that offered your fledgling company its first loan way back when all others rejected your applications, you might want to continue the banking relationship instead.

Especially so if you really have plans to use the additional funds and the rates offered by other banks are not significantly lower.

Before you jump on that offer, carefully think of the pros and cons of getting another loan. Be strategic and practical on how you intend to use the funds and ensure you have repayment means to service the loan. Do your due diligence and check out other alternative loan options if there might be cheaper and better solutions instead.

Remember, banks are business entities that want to maximize their profits too. A large part of their revenue and profits are from interest and fees.  While they must serve their clients’ needs, their foremost concern is to still to ensure profit maximization for their shareholders.