Understanding Business Loan Repayments
Whenever a business borrows money from a lender, they will be doing so under a repayment agreement. As long as the agreement’s terms are met, then the borrower will be able to rest assured that their loan will remain theirs to spend. Failure to meet these payment deadlines can however result in unwanted consequences, so it’s important to understand how business loans actually work.
The amount that can be borrowed
The first thing that any company will need to consider when applying for a loan, is how much they can afford to borrow. A lender will usually work this out in a way that incorporates the cash that is earned by the agency every year. As it can be impossible to predict how long the company might plan on repaying what they borrow, a bank will often offer several repayment plans for the business to choose from.
Once the sum has been agreed upon, the next thing that the company will need to do is come to an arrangement with their lender regarding how long they would like to pay back what is owed. Most lenders will define a cap or peak on the duration of their repayments and in the majority of cases, this will be eight years. Some will allow slightly longer, but it’s best to discuss these types of conditions with a loan broker, or with the lender themselves.
As soon as the duration has been agreed upon, the borrower will be able to choose the frequency of their repayments. Weekly can help to minimise costs over time, but monthly alternatives are the most common options chosen. Unlike with mortgages that apply interest rates, most lenders will instead propose APR, or annual percentage rates.
These rates are applied to a sum that is due to be repaid over the course of the year, allowing the borrower to stay on top of their repayments without having to worry about fluctuations. Furthermore, a company will have a choice of repaying what they intend to borrow as soon as they can, so as to minimise the duration of their debt; or adversely, spread the cost over a period of time that runs on for as long as possible – minimising the cost of each payment in the process.