When most small business entrepreneurs seek business loans, they tend to get a bit myopic about two items; the loan's interest rate and the loan's payment.
While these items are of extreme importance because if mismanaged they could be
extremely costly to the business. But, these items are usually out of the control
of the business owner. Most interest rates today are set based on the lender's costs
of funds (not the risk of the borrower) and the payment is what the payment will
be when all is said and done.
However, there is one factor that most borrowers overlook – a factor that they can
control in part and use to their advantage: the LOAN TERM. How can a business owner
use their loan's term to their advantage? Easily, as the loan term can provide your
business flexibility – giving you the opportunity to reduce your overall interest
as well as manage your payments during both slow and up periods.
Let's take a simple scenario. Your business borrows $50,000 for 3 years at 10% resulting
in a monthly payment of $1,614. You have tried endlessly to get the lender to reduce
your interest rate – even just 1 percentage point (you actually want a 3% reduction)
to help with your monthly payment. A 1% reduction would lower your monthly payment
to $1,590 – a bit more affordable. But, your lender will not budge.
Here is where your loan term can come into play. You then ask your lender to extend
the term of the loan to 5 years. At five years, your monthly payment would be $1,063
– some $500 per month lower then it would have been should you convinced the lender
to lower your interest rate (what you fought so hard for).
But, would this not mean that you would pay more interest over the life of the loan
– two additional years of monthly payments means two additional years of interest
payments at 10%?
The answer on the surface is yes – but, not when you bring in the flexibility of
the longer loan term.
If your business took the deal at a term of three years, your payment would be $1,614
as stated. Thus, you have to meet that minimum amount each and every month. But,
what happens when you have a slow month and struggle to make that payment? You go
into default and lose your business. However, with the 5 year loan term, you can
still make the larger $1,614 monthly payment. But, if you have a slow month, you
can reduce that to the required minimum of $1,063 – still staying within the guidelines
of the loan agreement. Then, the next month or during your next better sales period,
make up the difference; bringing your past payments back to the higher level.
With the longest term possible, this gives you, the manager of your business, the
opportunity to manage your business loan – making higher payments when feasible
and meeting the minimum level when necessary.
The only thing you need to take care regarding this payday loan ...