How do top-up loans work? – Forbes Advisor INDIA
A top-up loan is the amount that can be borrowed from a lender over and above your existing loan. Banks, mortgage lenders, non-bank financial firms, and other similar financial institutions offer top-ups to their active customers.
Top-ups are very common with home finance or mortgage companies because these customers typically have multi-year loan accounts and build equity by making payments on an asset. Businesses are dynamic entities, and it is next to impossible to anticipate unexpected expenses or to plan every aspect of an expansion or development plan. In such circumstances, a top-up loan can make sense for entrepreneurs.
However, many business owners are unaware that they too can access top-up loans. Here’s a quick guide.
What are top-up loans?
Top-up loans are an add-on option that most lenders offer their customers on top of an existing loan. Top up loans can be mutually beneficial for both lenders and borrowers as in the case of the former it signifies the retention of a valued customer and in the case of the latter it serves as a quick and easy source of funding without going through the complete application process.
Having the existing borrower’s details and KYC in place means that the lender needs to perform a brief review of the revised documentation. This makes the top-up loan an impressively quick and convenient process.
Eligibility for top-up loans
Lenders only offer top-ups to customers who have a good track record of making regular loan repayments. This is the main criterion for being eligible. Missed payments in the past can negatively affect your chances, as can a low credit score, which could indicate that you’ve defaulted on your other loans.
As a rule, a top-up loan is less than the existing loan. Depending on the lender, you may be eligible for a top-up loan after paying a certain number of equal monthly payments (EMIs).
The number of EMIs required varies from lender to lender, with most requiring 12 to 15 months of EMI to be repaid on the existing loan before a top-up is approved. It can be incorporated into the existing loan or listed as a separate loan.
Advantages of a top-up loan for companies
Aside from the main benefit of giving you access to the capital you need, a top-up loan is generally readily available and offered at a lower cost. Therefore, a business booster loan can be viewed as a form of instant financing that can be very beneficial for an entrepreneur.
- Top-ups are paid out much faster as the process is quicker and easier than applying for a new loan. The documentation process is smoother as the lender usually only requests the updated income documents.
- Since the customer is known to the lender, there are usually no personal checks before the loan is approved, which also speeds up and simplifies the loan process.
- The interest rates can be lower than the interest rates of the existing loan. Generally, top-ups come with little or no additional handling fees or insurance costs.
When should you opt for a top-up loan?
Like any business loan, top-up loans can be used for a number of different purposes including construction or repair or business premises; purchase of equipment or machines; hiring or paying staff; upgrade to new technology; purchase of inventory; Expansion of your product portfolio; opening your business in a new location; coverage of emergency costs; stabilization of cash flows; and so forth. Here are some common circumstances when you should opt for a top-up loan for your business:
- You’ve started a business improvement or expansion project, and over time new requirements have emerged that need immediate funding
- You’ve landed a large order and a start-up loan can help you quickly fund the materials you need
- You have a sudden business expense, for example a machine needs repairs
- You can use the top-up loan to differentiate yourself from the competition by purchasing inventory or raw materials
- Not ready to take out a full second loan but need short-term funds to run the business
While it may sound tempting to accept a top-up loan offer, it’s important to remember that this is still a loan obligation and will likely extend your existing loan term. Defaulting on a top-up loan has the same impact 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 you are willing to continue making timely payments in the months to come. The speed and convenience of top-up loans can be a boon to business owners looking for an extra boost in financing when they need capital quickly.