From traditional loans to alternative funding, there are more types of business financing programs available today than there were but a decade ago. But no matter which type of business financing you are considering, there are some “fine print” items and terms you should look out for, because they can end up placing a strain on your business finances in the long run.
Variable Interest Loans
Loans are a big responsibility for businesses of all sizes. Taking on debt in exchange for capital has a good amount of risk to it. Usually, the terms of business loans are amenable, and are ultimately designed to help businesses stay afloat, at the very least. Variable interest rates, however, can pose a major challenge to businesses. Traditional lenders frequently offer loans with variable interest rates, which usually go up as time goes on. This means loan payments on business financing are not static, so budgeting for monthly installments is extremely difficult. Since many businesses have multiple loans, that means the total amount being paid on each can vary, turning accounting and cash flow into huge headaches.
Balloon payments are associated with types of business financing that offer flexible payment methods, such as a merchant cash advance. Flexibility is good for small businesses owners, who might not have high sales or revenue to take on loans with regularly scheduled payments. However, if the balance owed is not paid off before the specified terms are up, businesses could be facing one large payment at the end of it all. This balloon payment is the remainder of the balance, typically with fees and interest, and can often force businesses to take out an additional loan just to cover the amount owed, which places more debt on the books and lock businesses into a debt cycle.
While prepayment fees are not too prevalent among private and alternative lenders, they are frequently attached to more traditional forms of business financing. If your business takes out a loan, and you find yourself in a position to pay off the balance early, that would seem like a wise financial decision. After all, why drag out debt when you can repay the loan ahead of schedule and start rebuilding your business credit ratings? Unfortunately, most lenders generate revenue from the interest rates when they are spread out over months and years, so paying off the balance early threatens to reduce their bottom line. To get as much money from borrowers as possible, lenders use prepayment fees, which are penalties that are triggered when a business attempts to overpay or completely zero out the balance of a loan ahead of the terms.
At New Century Financial, we specialize in accounts receivable factoring solutions for businesses. Our factoring services are designed to get you money from your unpaid invoices faster, with no balloon payments, no hidden fees, and no term contracts. Contact our offices today to learn more.