Why Is The Repayment Term For Your Business Borrowing Important?
There are a number of factors that need to be considered when applying for business finance one of which is the term over which you want to borrow the money. So, why is this an important aspect of borrowing money?
Well, the number of years over which you repay say a business loan or a commercial mortgage has some considerable bearing upon how much you will pay back the lender each month to repay the debt by the end of the agreed repayment period. When preparing a cash flow forecast to support a request for finance from your bank or other lender you will need to decide how much the business can afford each month in repayments for this borrowing and include this in your cash flow forecast.
There is no point in over committing the business by agreeing to repay a business loan at say £2,000 per month when in fact it can only afford to pay back the borrowing at say £1,500 per month. Agreeing to repay too much each month could cause the business great problems in terms of managing its cash flow on a day-to-day basis.
Having said that it is important that, as a business owner, you realise that the longer period you borrow over will mean lower monthly repayments but it does mean that you will end up paying back the lender more in interest.
To demonstrate this, see the following two examples that are purely for illustration purposes: –
1. Borrow £25,000 over 5 years on a capital and interest repayment basis at an interest rate of APR representative 8.9%.
Repayments are £513.39 per month. Total amount repayable £30,815.40.
2. Borrow £25,000 over 3 years on a capital and interest repayment basis at an interest rate of APR representative 8.9%.
Repayments are £789.84 per month. Total amount payable £28,434.24.
As you can see, by borrowing over the shorter term you pay £2,381.16 less in interest but of course your repayments are £276.45 per month more over the shorter period.
Another factor that needs to be taken into account when deciding upon the term of any business borrowing is in relation to what the monies are being used to buy. For instance, if you are buying business premises then you may be agreeable to borrow over a longer term i.e. 10, 15 or 20 years. However, if you are buying a new business van and intend to replace it with another new one in say 3 years time then it would be preferable to borrow the funds over a 3 year term rather than a longer period so that the finance is all repaid when you come to want to change the vehicle.
We trust that you have found the above to be of benefit. These factors and many more are taken into account by the commercial mortgage broker who will be able to help in the packaging of your borrowing proposition.