Low Repayment Business Loan
At Pinnacle Business Finance, this is a phrase we hear a lot. Almost 70% of inquiries start with such a statement. As with our article on cash flow, this is often where small businesses go wrong. The focus on small repayments can blindside businesses into a business loan when other forms of finance may be better suited. Small repayments often mean a longer-term and therefore a longer obligation. The level of repayment doesn’t always match the level of borrowing, especially given the variance in rates. Often businesses go for a low rate. However, they are not aware of what security or other covenants they have agreed too. All these can be mitigated by a decent commercial finance broker.
We have eluded to the fact that many businesses enquire about a business loan due to familiarity with the product. At Pinnacle Business Finance we focus on understanding a business and the root cause of problems. Last month we spoke to a business who tried to sell us the positives of small repayments and the extended loan term. In fact, the business had used another commercial finance broker and initially, they were satisfied. The business had picked up and they had heavy penalties for settling the business loan early.
With 3 years left it was stopping them for gaining the finance they needed to purchase additional stock. Fortunately, we got them a trade finance facility, but they must fulfill the other loan terms. All this could have been avoided if they had taken a business loan over 1-2 years with the ability to pay it off early with no penalty. Being agile in business is key to survival and a similar attitude to finance will have the same effect!
We often speak to businesses to present the options open to them so they can choose what is right for them. We get asked what is the cheapest, purely focusing on the lowest repayments. When we depict the loan terms and the full amount repaid, they are often shocked at the additional interest accrued through an extra year. The loan terms should always be a consideration as this can have a dramatic effect on your cash flow projections. If you are stuck putting your profit into a lenders pocket through interest, then it can inhibit your ability to borrow more.
Security around any borrowing is key with business loans. They are largely unsecured with only a personal guarantee. We work with lenders who are completely unsecured with no PG element and this comes at a small premium. Any business needs to assess what is right for them and understand that the lender will have a risk vs reward matrix. In short, the higher the perceived risk, the higher the repayment. A good commercial finance broker can help point out the obligations with each. Looking purely at the loan term and small repayments may mean you miss what security you are putting into the deal.
We have seen several businesses stuck with cashflow problems because they wanted a small repayment. The longer loan term has meant they are paying a business loan back for a project or item that has surpassed. It leaves a business paying additional interest and being prohibited from borrowing more. A decent commercial finance broker can explain the options available and ensure you make the right decision.
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