While taking out a business loan can give a massive boost to your company, the funds used to pay for employees, equipment, and expansions do need to be repaid. There are some considerations you have to keep in mind when agreeing to a repayment plan.
First, what is the interest rate and how often will you need to make payments? You will also want to think about the terms of the loan and whether you can afford the monthly payments. Though this article is a useful guide, be sure to contact your lender if you have any questions or concerns about repaying your loan.
When you make loan repayments, you will typically have a set repayment schedule. This is the timeline that outlines when your payments must be made and how much you need to pay each week or month. It is important to stay on top of your repayment schedule as making late payments or missing deadlines can result in penalties or other fees from your lender.
Types of repayments
When you make loan repayments, there are two primary types of payment: principal and interest, or just interest. Principal and interest payments are typically made on a weekly or monthly basis, which means that you will be required to make regular payments until the loan is paid off. Interest-only payments mean that you are only making payments on the interest of your loan balance while the principal remains unchanged. This can be beneficial if you need to free up cash flow in the short term, but it can be more expensive over longer durations. Check the conditions of your specific loan to see what types of payments they allow.
Principal and interest payments
This is the most common type of business loan repayment.
When you make principal and interest payments, the amount you pay each month will include a portion of the loan’s original principal plus accrued interest. As your payments continue, both the principal balance and the total amount of interest are reduced. This helps to reduce the total outstanding balance of your loan over time, compared to making only interest repayments.
The other type of loan repayment is interest-only payments.
With this type of payment, you only pay interest accrued on the debt. The principal remains unchanged throughout the life of the loan, meaning that your total outstanding balance does not decrease with each payment, expanding the repayments over a longer period. Interest-only payments can be beneficial if you need to free up cash flow because of financial difficulties, but they can be more expensive over longer durations. Be sure to read the conditions of your specific loan to understand what types of payments you are allowed to make.
The amount you will need to repay each month will depend on your loan agreement and the type of repayment plan you have chosen. Most lenders require a minimum payment per month, which is typically set as a certain percentage of your total outstanding balance. This means that if you make only the minimum payments each month, it will take longer to repay the entire loan, but frees up more money for other investments over the repayment period.
If you have additional funds available and the lender agrees, it is possible for a borrower to make voluntary payments on top of your minimum payment. Making extra payments means that the principal balance of your loan is reduced faster and thus you pay less interest in total over the repayment period. It is important to check with a financial advisor and your lender before making extra repayments, as some loans do not allow for voluntary repayments or have restrictions on what type of payments you can make.
Security or collateral
OnDeck business loans are unsecured, meaning that you do not need to provide any security or collateral for the loan. However, other lenders prefer to offer secured loans, meaning they may require you to provide a form of security or collateral in exchange for a more favourable interest rate. This could include property, stocks, bonds or other assets that can be used as collateral if you fail to repay the loan.
Prepared by OnDeck Capital Australia Pty Ltd ABN 28 603 753 215 (“OnDeck”) for general information purposes only. Content may belong to or have originated from third parties and OnDeck takes no responsibility for the accuracy, validity, reliability or completeness of any information. Information current as at March 2023. You should not rely upon the material or information as a basis for making any business, financial or any other decisions. Loans issued in Australia are subject to the terms of a loan agreement issued by OnDeck. Loans are subject to lender approval. OnDeck® is a Registered Trademark. All rights reserved.