How do add-on loans work? – Advisor Forbes INDIA
A top-up loan is the amount that can be borrowed on top of your existing loan from a lender. Banks, mortgage companies, non-bank financial companies and other similar financial institutions offer top-ups to their active customers.
Top-ups are very common with housing finance or mortgage companies, as these customers tend to have multi-year loan accounts and build equity by making payments for physical real estate. Businesses are dynamic entities and it is virtually impossible to forecast unexpected expenses or plan every aspect of an expansion or development plan. In such circumstances, a supplemental loan can be useful for business owners.
However, many business owners are unaware that they too can access complementary business loans. Here is a quick guide.
What are complementary loans?
Top-up loans are an add-on facility offered by most lenders to their customers with an existing loan. Complementary loans can be mutually beneficial for both the lender and the borrower, since in the case of the former it means the retention of a valuable customer, and in the case of the latter it is a source of quick funding and easy without going through the full application process.
Having the existing borrower and KYC details on file means the lender should perform a brief review of the revised documentation. This makes the add-on loan facility an incredibly quick and convenient process.
Complementary Loan Eligibility
Lenders will only offer refills to customers who maintain a good track record of regularly repaying their loans. This is the first criterion to be eligible. Any history of missed payments can negatively impact your chances, as can a low credit score, which could indicate that you’ve defaulted on your other loans.
Generally, an additional loan is for a lower amount than the existing loan. Depending on the lender, you can qualify for a top-up loan after a certain number of monthly equivalent payments (EMI) have already been paid.
The required number of EMIs varies from lender to lender, with most requiring repayment of 12-15 months of EMI on the existing loan before approving an add-on. It can be integrated into the existing loan or be listed as a separate loan.
Benefits of an add-on business loan
In addition to the main advantage of giving you access to the necessary capital, an additional loan is generally available quickly and offered at a lower cost. Therefore, an add-on business loan can be considered a form of instant financing, which can be of great benefit to an entrepreneur.
- Refills are disbursed much faster because the process is faster and easier than applying for a new loan. The documentation process is smoother since the lender usually only looks for updated income documents.
- Since the client is known to the lender, in-person checks before loan approval are usually dispensed with, which also speeds up and simplifies the loan process.
- Interest rates may be lower than existing loan rates. Typically, top-ups have less or no additional processing fees or insurance fees attached to them.
When to opt for an additional professional loan?
Like any business loan, top-up loans can be used for different purposes, including construction or repair or business premises; purchase equipment or machinery; hire or pay staff; upgrading to new technologies; purchase inventory; expand your product portfolio; open your business in a new location; cover emergency expenses; stabilize cash flows; etc Here are some common circumstances when you should opt for an add-on loan for your business:
- You have started a business improvement or expansion project, and along the way new requirements have arisen that need to be funded immediately
- You have received a large order and an additional loan can help you finance the necessary materials quickly
- You have a sudden business expense, for example, a machine needs to be repaired
- You can use the top-up loan to get ahead of the competition by buying stocks or commodities
- You do not want to take out a second full loan, but you need immediate funds for business operations
While it may seem attractive to accept an add-on loan offer, it’s important to remember that this is still a loan obligation and will likely extend the term of your current loan. Defaulting on a supplemental loan has the same effect on your credit score as defaulting on any other loan obligation.
Therefore, you should only consider taking out a top-up loan if it is necessary for immediate business needs and if you are prepared to continue making on-time payments in the months ahead. The speed and convenience of top-up loans can be a boon for business owners looking for additional financing when they need capital fast.