It is hard enough to get a business loan these days. And, even harder if you want that loan to work for you – allowing your business time to leverage those loan proceeds to grow your business and repay the loan.
When most business owners consider a business loan they think about the interest rate as they don’t want to overpay for the loan.
But, the interest rate on your loan might not be the most important factor in reducing your loan payment.
The term you negotiate may have more impact.
Let’s take an example:
Your business is seeking a $100,000 business loan and gets offered one at 9% for 36 months.
This makes your monthly payment $3,180.
If you negotiate a lower interest rate – say at 7% – your monthly payment would drop by just under a $100 per month. A good savings but not spectacular.
But, instead of negotiating your interest rate you get the loan term increased by one year or 12 months.
This relates into a monthly payment savings of nearly $700 – making your loan payment $2,488 per month – much more affordable.
Now, while under this scenario your business could pay additional interest to the lender over the life of the business loan. But, as you can see, you can make up that difference in a short time from your monthly saving – further using that $700 monthly savings to fund other needs in your business.
Plus, the most important aspect of getting a quick working capital business loan is using those funds for growth and expansion. If done properly you can use those loan proceeds to repay the loan through increase business or by improving operational efficiencies.
Thus, the additional interest that you might pay is far less detrimental to your business over the long term then either not getting a loan in the first place or having payments that are not affordable – potentially putting your business in a position to default and lose everything.
Moreover, in the following months that your business does have solid revenue, you can always pay a little additional principal to help reduce your overall interest.
If you have a great opportunity that you need outside business capital for but you want to keep your payments manageable – giving you time to reap the benefits from that opportunity – then the term on your business loan may have more of a positive impact in lowering your monthly payment then your potential interest rate.