The 8 Questions Small Business Owners Should Ask When Seeking Capital: Question #5
Question 5: What are the repayment terms?
Before they become small business owners, most people have only been exposed to loans through consumer lending. These loans typically follow a monthly repayment schedule and have standard terms across the board. Commercial lending, which includes loans made to small business owners, is often a different story. These loan agreements tend to follow different schedules and repayment terms. The repayment options can range from daily to monthly depending on the loan. This wide variety of options may seem confusing at first, but making the right choice can benefit small business owners who do their homework.
Although a monthly repayment schedule may be the most familiar, it isn’t always the best option. It can be difficult for small business owners to keep to this schedule if their cash flow changes daily. It takes a lot of discipline and advance planning to track exactly how much you need to set aside each day to meet the payment amount at the end of the month. If you miscalculate, it could put your business at risk of defaulting.
A more frequent repayment schedule can make it easier to stay on track with loan obligations. Many commercial loans follow a daily schedule. This consistency can make it easier to stay on top of payments since it spreads out the burden of the loan obligation, allowing your business to make a number of small payments rather than one large one. If you know your business will be taking in funds on a daily basis this may be the simplest way to keep up with payments, as you won’t need to scramble or move funds around in order to cover one large bill. Commercial lenders may also offer weekly or bi-weekly payment schedules for businesses with different cash flows.
In order to simplify the payment process, most lenders establish an automatic ACH withdrawal from either your business credit card or bank account. If you need additional flexibility, lenders are usually more willing to make modifications to the terms if the payment is guaranteed. For example, some work with insurance commission, which means that your business’ income is first redirected to the lender, who takes the designated portion and then sends the remainder back to you.
Whichever repayment terms you choose, make sure that they match your cash flow and won’t lead to trouble down the road. Don’t agree to terms that won’t work for your business and avoid borrowing more than you can handle paying back. If you’re unsure of how much you’ll need, consider looking into a revolving line of credit instead. Most importantly, make sure you fully understand all of the terms before signing on the dotted line.